Diana the Valkyrie's Guide to the Internet
A hard man is good to beat
It's the big hot area - internet stocks. Wouldn't you like to won a part of a company like Amazon.com, and watch your investment double, treble ...
We all want easy money. Let's examine this proposition carefully. First, let me explain the sources of the information I give here; one important one is the Securities Exchange Commission database, which anyone can access free. This is data that the company has to return about itself, and that data had better be true, or the directors of the company can go to prison.
The other sources I use, are scattered about the internet, I'll give them as I go on. But I'm not going to give you any "hot tips", or even any investment advice. What I'm going to do, is show you how you can find out information about a company, and the kinds of things to think about when you're making investment decisions.
First of all, investment 101. The economic value of a company, consists of the profits that it makes, and the profits that it will make in future. If a company is doing well now, and expected to continue doing well, then people feel comfortable about putting money into it. So, what should the share price of such a company be?
First, let's look at a "safe" investment; Uncle Sam. If you loan $100 to Uncle Sam (via government bonds), he'll pay you about $6 per year. Another case - if you loan $100 to News Corp, you'll get about $7.40. That's because News Corp is slightly higher risk than Uncle Sam, so the extra $1.40 is the incentive that persuades you to take that higher risk. We say that the "yield" is 7.4%. Now let me introduce another concept, the Price/Earnings ratio, or P/E. If the price is $100 and the annual earnings are $6, then the P/E is 16.7, simple arithmetic. Earnings is another way of saying "profit", by the way, because in some cultures, "profit" is a vulgar word.
Now let's look at stocks. A bond is a loan to the company; stock is part-ownership of that company. Bonds are "safer", because if the company goes toes-up, the bonds are paid off, then stockholders get a fair share of whatever is left, if anything. Often there's nothing. So, stocks are riskier, but the rewards are higher, in general.
Remember that the economic value of a company is the current and future profits. So, the share price of a company, is the value of the company, divided by the number of shares. This is made more complicated by the way that companies sometimes "split" their shares, giving you a free share for each one you already had, which halves the value of each share. I don't know why they do this, I've heard that "people don't like shares that are too big in value".
I just checked IBM in the Financial Times. Their P/E is 30. The price of the share is 30 times their current profits. The yield is 0.4%, meaning that if you invest $100, and IBM pays out dividends as in the most recent past, you'll get $0.40 per year. But of course, dividends are only the part of the profit that is distributed, there's more profits that the company keeps for re-investment and other purposes. To get the details, check Edgar. That P/E of 30, means that on average, people are optimistic that IBM will do better in the future than they currently are.
Then I checked Amazon.com in the Financial Times. They don't have a yield, or a P/E. That's because there are no profits, so you can't work either of those out. I went to Edgar to confirm this, telling it to search for Amazon. Then I looked at the 10-Q report (quarterly earnings). Net loss for the quarter ended June 1999, was $138 million.
So then I went to Nasdaq, and asked to look at AMZN. You can look at share prices, at how the shares have performed in the past (they hit 100 at the end of April, and are currently (as of early Spetember) at $62). You can find out any current news that might be significant - I did that, and found the latest Reuters, talking about a recent bit of good news for internet stocks, and they mentioned Amazon, Yahoo, Ebay and AOL as "Leading internet stoocks". That's why this article focusses on those four. By the way, most of the "news" items there are company press releases, so the excited enthusiasm is from the company PR people. And PR person who isn't excitedly enthusiastic for the company they work for, is executed by firing squad.
So, since Amazon is making a loss, how come the company is valued at $20 billion? By the way, in case you're wondering how I worked out the $20 billion, it's 323 million shares, multiplied by $62. Well, clearly, there's hope that it will make profits in future. Because, equally clearly, if it doesn't, then why would anyone want to own part of it? And the hope must be that those profits will be big! Since you can get a safe $4 per year from Uncle Same for your $62, people must be hoping for somewhat more than that. If they're hoping for $5 per year, then they're hoping that Amazon will make $1.5 billion per year. Maybe they will, maybe they won't. That's for each person to make up their minds on.
Another good figure to look at, is net current assets. Assets are what a company owns; books, and computers, and buildings, and cash in the bank, and things that can very easily be turned into cash (such as bonds from Uncle Sam). Liabilities are what a company owes; current liabilities, are what they owe that needs to be paying soon. So, "Current assets" minus "Current liabilities" is like what they have to spend. When you run out of those, you're in trouble! So, it's interesting to see how far a copany is from running out. That's called "Net current assets". Amazon's current assets, according to Edgar, are $1257m and current liabilities are $278m. So, net current assets are $979m.
It's especially important to have a good sized net current assets when you're losing money each quarter. Those losses have to come from somewhere. When you're making big profits each quarter, you aren't so worried about having cash in the bank, you know there's more on the way each week.
How about Ebay (Nasdaq code EBAY, Edgar code EBAY)? The share price (early September) is $133, there's 125 million shares, so the company is worth $17 billion. Their sales in the three months ending June 30 1999 were $49 million, losses $0.3 million.
Yahoo (Nasdaq code YHOO, Edgar code Yahoo). On sales of $115m, the losses were $15m. The shares are $155, so the company is worth $32 billion.
The fourth stock that Reuters mentioned is AOL (Nasdaq code AOL, Edgar code AOL). On sales of $1377m, they made $160m profits. The share price is $97, so the company value is $105 billion.
And finally, for comparison - Microsoft. (Nasdaq code MSFT, Edgar code Micorosoft). On sales of $4595m, they made profits of $1917m. The stock price is $96, giving a company valuation of $489 billion. Net current assets are $16m. That might not sound like much, but when you're making nearly $2 billion profit per quarter, you don't need much cash in the bank as a cushion.
The figures given below come from Edgar, and are of the quarter ending June 30, 1999. The EPS (earnings per share) figure comes from Nasdaq, and it's an annual figure, not quarterly. The EP$100 is based on that, it's the earnings per $100 worth of shares, using the share price at the point in time I looked it up. The EP$100 for Uncle Sam bonds, is $6. Most people use a thing called "P/E ratio" for this; that's the price of the stock divided by the earnings. My EP$100 shows exactly the same information, but I think it's easier to understand, because it's a bit like showing the interest rate you're getting. If you're interested, the relationship is EP$100 = 100 / EPS.
| Company | $m Sales | $m Profits or (losses) | Share price | $m net current assets | EPS | EP$100 |
| Amazon | 314 | (138) | $62 | 979 | Negative | Negative |
| Ebay | 49 | (0.3) | $133 | 73 | $0.05 | $0.04 |
| Yahoo | 115 | (15) | $155 | 470 | $0.14 | $0.09 |
| AOL | 1377 | 160 | $97 | 254 | $0.60 | $0.62 |
| Microsoft | 4331 | 1917 | $196 | 16 | $1.42 | $0.72 |
The figures above, are based on prices at the start of September. You can recalculate this table any time you like, just consult Nasdaq and Edgar.
So, how do you decide what to invest in? There's a zillion ways. One way is "Follow the herd". If a lot of people pile into a stock, then the price goes up. If you were at the front of the herd, you'll do well. But if you're at the back of the herd, then you're buying the stock when its price peaks, and you can watch as your investment evaporates.
Some people claim to be able to tell what a stock is going to do, by looking at the past chart of prices and volumes traded, which you can find on Nasdaq. This is called "chartism", because you're gazing at charts. It's also called "technical analysis", because you wind up doing plenty of arithmetic. Other people say that the stock market has as much memory as a pair of fair dice, and betting that the next throw is snake-eyes has the same odds irrespective of what the dice came up in the past.
You've probably had emails offering you "Stock tip newsletters". Well, that's mighty nice of them. Why are they doing it? Some of them might be running the old "pump" scam, where you buy a bunch of shares in a company which is quoted but moribund, pump up the shares by spreading rumours and hot tips, then once you've unloaded all the shares at the increasing price that your pump has caused, you're free and clear, and don't care what happens to the price now. So, you buy a bunch of shares in another company which is quoted but moribund ...
On the other hand, some of the stock tips newsletters aren't like that.
Another way of looking at shares, is to look at the business that the company is in, and the profitability of that now and in future. Also, does the company management seem to know what they're doing? To find out stuff about a company, look at Edgar. Also look at their web site, and think about what they're trying to do. I have this deep prejudice against any company who assumes that I behave differently from the way I really do. For example, there's one web site I visited to buy computer parts, where in order to see what they have and maybe order, I have to have "Shockwave" installed. I don't have it, and I don't want to install it. So, I can't buy via their web site. If I were considering investing in that company, that would be a big minus, because why would I invest in a company that thinks that potential customers should jump through hoops in order to buy from them?
When a company is old and established (like Microsoft, for example, because in this industry, five years is a long time) and making profits, then you can look at their track record. Nasdaq and Edgar are good sources, as always. You can also find, on most corporate web sites, and thing called "Investor relations". If you contact those folks, they'll send you reams of info about the company. And that info had better be true, or someone could go to prisin. Of course, you'll have to read it carefully to see any black holes. AOL is another "old and established" company, but their track record isn't what you might have thought. I looked at Edgar, and found that their net income from operations looks like this (million dollars):
| 1999 | 1998 | 1997 | 1996 | 1995 |
| 458 | (120) | (485) | 64 | (41) |
So it's only recently that the profits have arrived for AOL. Maybe you already knew that.
For most "internet companies", there is no kind of track record, or maybe just a series of losses. Yet the companies are flourishing, and the stock prices bubbling, so clearly some people think they're worth investing in. Obviously, the hope is that they will make profits in future.
But will they? You'll have to guess. And listen to their plans - why do the company officers think they'll make a profit? Listen to their pitch, and then add the requisite pinch of salt. One frequently used argument is that the first player in the field, gets all the touchdowns. Well, that's probably true if you're the only player on the field, but success attracts competition. If you look at online bookstores, you'll find dozens now. And if you don't know which one to use? Then check out acses, which lets you compare prices across different internet bookstores.
And for those companies that are hoping to make money out of displaying advertisements, will they succeed? Advert-blocking software is readily available, but I'd guess that very few people use it. Will that change? Will advertisers continue to pay for adverts that are being blocked from view?
One of the effects of the internet, is that it makes shopping around for the best price a lot easier. You want a web site? Look at Budget Web and see who's cheap for what you need. You want electronics or computer hardware? Check out Pricewatch
Well, if you were expecting me to give you a hot tip, or sound investment advice, then tough luck. I did say at the beginning that I wasn't going to do that. But I hope I've shown you some useful sources of information, and explained some of the terms they use, so that you can make your own investment decisions in a better informed way.
Good luck!