6b. Prices, stock images & "new economy"
(First published: March 10, 2000, just before the Nasdaq crash !)
What are those "new economy" firms?
The so-called NE / new economy firms are, in a broad sense, companies that supply, or use
intensively, high technologies (electronics, software, communication, biotech, aerospace...).
But in the common, narrow sense, this is limited to :
Suppliers of telecom / computing hardware and software
Telecom & Internet physical networks
On line suppliers of goods, services, links or information, if they are "pure play"
(in other words without a big share of pre-existing activities)
Estimated economic value (EEV) of these firms
Mainly for pure play online suppliers, it is about impossible to obtain believable figures of
projected EPS in 5 years.
It is not even sure there will be earnings.
Customers "acquisition costs", in fact advertising costs, are put forth as the reason
for such not visible or tiny or absent profitability.
In lack of profit reference to reckon the economic value, the market uses a "default" value.
The good old "assets value", but renovated, as a virtual assets value including:
The worth of the firm's know how (technical advance, quality of service and marketing)
Above all, the sale value of its brands and its recurrent customers' portfolio.
For example, according to the kind of services offered, 1, 10, 100, 1000 or
10 000 dollars per subscriber or recurrent user.
The trick is that this default value is used as an "exchange currency" in case of takeover
by, or merger with, another firm.
Here, the "creation of shareholder's value" becomes pure monetary creation.
Genuine money or casino chips? That is the question. let us look at it.
(see also Helge Loekke contribution on possible shifts in the Internet chain of value)
There is nothing wrong to use alternative criteria to measure economic value.
Except in cases in which they hide the fact that the main objective, economic
can never be attained
or cannot be attained at a level corresponding to this value estimate.
And here we have to bear in mind that Internet strategies change overnight
(risk of rapid obsolescence, even for "firstcomers" or "leaders") and competition multiplies
In many cases, expected profit margins risk to be bitten off.
Revenues and margins risk to be never big enough to give profits in proportion to:
The customers acquisition costs,
Or the stock market value, puffed up by a lofty image (see below).
Or the exchange value if there was a takeover or merger operation.
Image value for these stocks
Normally, you would expect to find, in our p. 4 tables and p.5 descriptions,
the image types of these stocks among the following families:
Most often, the "pre-emerging", "lottery tickets" and "shooting stars",
Or in the best of cases, the "emerging", or even the "steadily emerging" businesses.
Before calculating an image, one must do a reasonable VEE evaluation.
It could use if necessary this assets value criterion, easier said than done, as seen above!
Comparing these EEV to current prices, it seems the present speculative market bubble
produces image coefficients much above the page 4 tables' "high limits" (remembering
they are indicative).
Except error, for many of these stocks, current prices are 0-20% EEV and 80-100% image.
Image coefficients between 100/20 = 5 and 100/0 = infinite!
Such puffed up prices seem hardly sustainable. A big risk of backlash!