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Commentary: Eyeballs, Bah! Figuring Dot Coms' Real Worth

Commentary: Eyeballs, Bah! Figuring Dot Coms' Real Worth

Last month, when Inc.'s investor-relations team went to Denver to visit mutual-fund company Marsico Capital Management, it delivered its usual spiel: Amazon is a great play because of its "first to market" advantage. Big mistake. Last winter, such talk might have raised millions from Web-happy investors. But at Marsico, the pitch fell flat. Nor do Marsico folks give a hoot for "monthly unique visitors" or "eyeballs." All they want to know is when Amazon and its ilk will turn a profit. Says James A. Hillary, manager of Marsico's 21st Century Fund: "We made it very clear that we love Amazon--as consumers. We don't like Amazon as investors."

Neither do a lot of others. Wall Street today is engaging in a fundamental reevaluation of the high prices sported by leading dot-coms. After a brutal spring and summer, Amazon's stock has continued to drop like a bomb as investors take a more realistic view of its earnings prospects. Amazon lost a quarter of its value on Oct. 6-18, dragged down by continued questions over its strategy of adding such products as kitchen tools and garden furniture to its mix. It now trades at 25--down 78% from its December, 1999, high of 113.

Amazon is hardly alone. Yahoo! Inc. has fallen 38% since its Oct. 10 earnings report. It is now at 53, down from 250 in January, despite trumpeting consistent profits. The problem: Yahoo's valuation was based on expectations it could keep up its exponential growth. Even the bluest of the sector's blue chips--America Online Inc.--has fallen 15 this month over concerns about an ad slowdown. All told, of the 36 companies in the Goldman Sachs Internet Index, only five have held their value this year. "People are just more cynical about evaluating them," says John P. Molner, head of mergers and acquisitions at Brown Brothers Harriman. Investors, he says, now ask: "Do they have a clear path to profitability, and is it worth the price?"

Until this year, Net companies and their investment bankers and analysts did a good job of getting people not to focus on such basics. In a remarkably successful game of "don't look there, look here," they conjured up a host of new valuation models to justify astronomical prices for companies with often meager revenues and nonexistent profit. Instead, investors adopted a lexicon of Web jargon to gauge performance by what have turned out to be largely irrelevant measures: "stickiness" (length of site visit), "eyeballs" (number of people who see a Web page), and its self-important cousin, "mindshare"(a fancy name for brand awareness). Mergers and acquisitions were being priced on multiples of "monthly unique users" (MUUs) of a site or even just registered users. Now, says banker H. Peter Nesvold of Columbus Capital Co., such talk has "gone out the window."

Indeed, dot-coms are today being compared with the traditional companies they once promised to trounce. Gone is the assumption that being Net-based gave a company fundamentally better prospects than its real-world rivals. "People are saying E*Trade is a broker. What's it worth as a broker? is a travel agent. Yahoo is a media company," says Gary Dvorchak, senior vice-president for research at Provident Investment Counsel. "Amazon is going to have to cope with the fact that they are driven by Christmas and have to deal with all the same things any retailer has to deal with."

ANYBODY'S GUESS. So what should a Net company really be worth? For the vast majority that, like Amazon, have yet to post a profit, that's still largely a matter of guesswork. But even without relying on price-earnings ratios, other valuation benchmarks, such as comparing a stock's price to its sales per share or to its book value per share, provide a useful gauge. Such measures show that many Net companies have dropped sharply this year and are now much closer--and in some cases, even below--those of their Old Economy counterparts.

Whether these stocks have finally fallen to their proper value is anyone's guess. Despite its deep plunge, for example, Amazon remains more highly valued by some measures than other retailers. "The market concluded the [Net stock] valuations were insane," says UBS Warburg analyst Charles Wolf. "It's an open question whether they've reached the level of sanity." The answer would require knowing what that is.