OT: Bill Bonner says........

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High Priestess Speaks

The Internet is so big and growing so fast -- the profit potential is nearly infinite. This argument, which could be made for China as well, is used to support high price-to-sales ratios for Internet companies. But the numbers never quite make sense.

Let me interrupt myself to point out that you and I are probably both getting tired of this discussion. Internet stocks are at lunatic highs. But most of them will be less high in the future. There is probably little need to say more. We will watch and wait. Giggle and guffaw. Wonder and gape. And Mr. Market will do what he wants.

But I happened upon an interview with the high priestess of the Internet cult in Barrons which triggered a look at the whole delusion from a new angle.

"At some point in the next 5 to 10 years, 3% to 5% of GDP will be related to e-commerce," says Ms. Meeker. This is not at all hard to believe, since "related to" can spread a long way beyond the actual Internet stocks. Even our publishing business, which uses email and websites, could be said to be at least a remote cousin, once or twice removed, from e-commerce.

But the Internet sector is already valued as though it were more than 6% of GDP. The entire stock market capitalization is about $15 trillion. Internet stocks have about $1 trillion of that. And GDP is about $10 trillion. So, roughly, the Internet sector is valued as though it were 1/15th... or about 7% of GDP.

Mary Meeker sees no problem, but the whole sector is way ahead of itself. Who would pay $1 for something that may be worth $1 in 5 to 10 years?

Meeker believes that "90% of the Internet stocks are overvalued and that 10% of the companies are undervalued -- dramatically undervalued... The question is, which 10%." She has no way of finding them. So, she merely focuses on the frontrunners -- AOL, AMZN, and Yahoo. These stocks did very well -- for a time. But they are, alas, the very stocks that are most likely NOT to be the big winners of the future.

Let us say her 90/10 concept is correct. Among the 300 Internet companies, 30 will be winners. The others will be losers. If this is true, any investment you make in the Internet sector should be viewed as a 10 to 1 long shot. Accordingly, you can rationally pay up to one- tenth of what you think the stock may be worth, discounted further by the time it will take to reach success.

But the well-known Internet companies are priced as though they were already winners. In fact, they are priced at such high levels that it has become almost arithmetically impossible for them ever to justify their share prices. As pointed out here a few days ago, they would have to achieve the highest levels of profit growth ever recorded... and continue to do so forever!

We would all like to find the one Internet company in 10 that will be the big winner. But at today's lush valuations, it is almost impossible. The one that will justify its price is the one that has not yet attracted surplus capital -- the one you haven't yet heard about.

A recent issue of "Personal Finance" looked at the numbers too. It reported that the information technology sector trades at "a P/E 3 times projected growth rates." This implies that they expect elevated growth rates for a long time. After 10 years, at these rates of growth, 60% of the economy would be IT, assuming the rest of the economy continues to grow at about 5% annually. The trouble is, IT is currently much less than 10%... and it is only growing at less than 10% annually -- not the 30% the P/E rates suggest. In short, any way you look at it... the numbers just don't hold up.

Mary Meeker doesn't concern herself with these issues. She has faith. She is the Internet Priestess, high on AMZN, AOL, and Yahoo, of which she says, "I believe they will be three of the greatest brands we've ever known."

Maybe they will. But their share prices will collapse first.

Bill Bonner

-- James (brkthru@cableone.net), January 27, 2000

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