By Gene Marcial
No matter how badly battered the Internet stocks have been, investors can't afford to be completely absent from this intriguing sector. So say many investment advisers who point out that the Net is here to stay and can only become a much bigger marketing tool. And, they argue, the Net will blossom. The question is: Which stock should be the core Internet holding? The sector is obviously loaded with risk, so the pickings aren't exactly plentiful.
Among the Internet leaders, eBay (EBAY ), the world's largest online trading community, quickly comes to mind. And then there's Yahoo! (YHOO ), a premier global Internet portal that provides a network of Web progamming to millions of people. Both have adamant advocates, although they all concede that eBay and Yahoo! still aren't cheap -- despite their steep declines. But eBay appears to be the more favored stock on the Street, based on several metrics when compared to Yahoo!.
The giant portal, even after losing nearly 90% of its market value from its record high of 150 a share, still trades at a lofty price-earnings ratio of 629, based on estimated 2001 operating earnings of 3 cents a share. In contrast, eBay trades 116 times estimated 2001 earnings of 43 cents.
Even so, analyst Anthony Noto of Goldman Sachs, which took eBay public in September, 1998, at a split-adjusted price of 3, is still high on the company. He definitely thinks eBay should be a core Internet holding. Says Noto: "While we recognize that the stock remains expensive despite the recent sell-off, we are hard-pressed to find other technology stocks that have accelerating fundamentals, strong top- and bottom-line visibility, clear leadership position, and global expansion potential requiring little capital in the deteriorating economic environment."
eBay provides a fully automated, 24-hour service through which sellers can list almost anything for sale, and buyers can bid for them. According to eBay President and CEO Meg Whitman, some 22.5 million eBay users trade in over 200 countries in 8,000 different item categories. eBay lists 500 new items a minute, she says, and generates $1,200 per minute in gross merchandise sales. In 2000, eBay generated $100 million in operating cash flow with an annualized run rate in gross merchandise sales of $6.5 billion.
Regarding Yahoo!, one big proponent is analyst Mary Meeker of Morgan Stanley Dean Witter, whose fame as an Internet stock-picker soared at the height of the dot-com mania and who remains committed to the sector (see BW, 4/30/01, "Tech's Cheerleader Won't Say Die").
She gives the stock an outperform rating "with a long-term view." This "high-risk, high-reward" stock is not yet out of the woods, acknowledges Meeker. But one of the best things she can say about it, the analyst adds, is that Yahoo!'s financial outlook appears to have stablized.
Strong growth in Internet users and usage will help drive the long-term success of a handful of Internet players, says Meeker. Given Yahoo!'s traction, she adds, "it's difficult to bet against the company." Based on her valuation methodologies, which include discounted cash flow and discounted price-earnings ratio, the stock, currently trading at 18 a share, has upside potential -- particularly "if the company executes to our financial projections."
One added plus about Yahoo! that some pros are betting on is the growing speculation that the company might end up being acquired by the likes of Viacom (VIA ) or Disney (DIS ).
But to Derek Brown, analyst at WR Hambrecht, eBay is the top Internet choice. It outscores Yahoo! based on several valuation metrics, he says. Brown figures that Yahoo! is about 472% more expensive than eBay based on estimated 2001 p-e ratios and 100% more costly based on 2002's p-e multiple. And looking at price-to-earnings-to-growth ratio, or PEG, Yahoo! is 1998% more expensive than eBay, based on 2001 numbers, and 632% more pricey based on 2002 estimates.
The third measure Brown likes to use is "enterprise-value-to-revenue-to-growth, or EV/R/G. Based on estimated 2001 figures, Brown figures that Yahoo! is 161% more expensive than eBay, and 182% more, based on 2002 numbers.
So he rates eBay, currently trading at 46 a share, a strong buy with a 12-month target of 60. The company's "outstanding" first-quarter results this year and its "bullish outlook," says Brown, distinguish eBay from others in the broad technology-Internet marketplace. Which stock will be the better bet, Yahoo! or eBay? Investors will have the last word.
Marcial is BusinessWeek's Inside Wall Street columnist