INTERNET STOCKS, VALUES, AND PROSPECTS: Some Musings (July 12, 1999)
The internet is a great leveler and transformer of business. Small and medium firms can now compete head-on with the mega corporations. Also, geograghic boundaries are reduced particularly for SERVICE INDUSTRIES.
Trying to value these new and upcoming enterprises is a bit dicey. For transformation businesses - out of bricks and mortar and into e*tailing - such as books or music selling, one must evaluate the revenues, profitability and market capitalizations of the traditional merchants. This is the starting point for valuation purposes. These businesses produce, hold licenses and copyrights, and otherwise supply the final products. Many web-based companies do not.
Therefore, a comparison of Amazon to the all book publishers and sellers is rather revealing. It suggests, in part, that all books will be sold via the largest market cap firm in this sector. However, Amazon's model has incorporated music, auctions, toys and other simple goods and services.
Given Amazon's increased breadth of shopping alternatives, it may be more reasonable to compare it to other general merchants such as Walmart, Sears or K-Mart. At the moment, these retailer/discounter stores provide an upper valuation boundary to the general store approach.
Similar comparisons can be made in the investment or brokerage and banking industries. Who is doing what now? How much are they making? What if it all goes to the net-based or .com firms? And, do not forget that the transaction profit margins are becoming thinner due to the efficiency of the internet.
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