By Jason Stamper
PeopleSoft Inc’s CEO, Craig Conway, says he dreams every night that the Dow falls 1,000 points. The way some of these stocks are valued just doesn’t make any sense, he told ComputerWire. According to Conway it would take a massive crash in stock prices for investors to put what he calls ‘more realistic’ valuations on some of the high tech stocks – particularly internet or .com stocks.
For example, with its stocks trading at $119, Red Hat Inc whose operating systems power many web servers has a market cap of $8.23bn yet revenues for fiscal 1999 were $10.79m (a price/sales ratio of 738). Yahoo! Inc is valued at $43.5bn yet revenues last year were just $203m and net income was $25.59m (price/sales ratio therefore of 214). How can Yahoo be valued more highly than someone like Texaco? asks Conway. Texaco Inc is not a technology stock, of course, nor can it climb aboard the .com bandwagon. What it does have is sales – 1998 saw sales of $17.17bn – 84 times higher than Yahoo. Yet Texaco is valued at just $35.44bn, a telling $8bn less than Yahoo. Texaco’s price/sales ratio is 2.06.
But if Yahoo’s valuation may leave Texaco’s executives scratching their heads, another internet stock will leave them positively suicidal. Search engine portal AskJeeves Inc recently went for an IPO and is now valued at $4.248bn. Sales last year were just $590,000 – so the price/sales ratio is 7,200.
Chairman of the Federal Reserve Board Alan Greenspan has come under fire this year for stating publicly that it’s possible that private investors are underestimating the risk involved with purchasing stocks. In a speech he gave in October, Measuring Financial Risk in the 21st Century, he said that: Information is critical to the evaluation of risk. The less that is known about the current state of a market or a venture, the less the ability to project future outcomes and, hence, the more those potential outcomes will be discounted. He argues that the availability of real-time information – much of it ironically transmitted over the internet – has reduced investors’ uncertainties, and so reduced their risk aversion. As those uncertainties fall, so does the equity premium (the margin by which the implied rate of discount on common stock exceeds the riskless rate of interest).
So when will the extraordinary valuation of Internet stocks end? As far as Conway can tell, there’s no end in sight: There was a time when 80% or 90% of stocks were held by institutional investors, he says. Now so much is in the hands of retail customers [private investors]; it makes me wonder whether there can ever be that stiff a drop. If people jump out and the price falls there are people lining up to jump in thinking it’s got to go back up again. Conway is right about the increasing proportion of private investors. An estimated 52% of all US households are currently invested in the equity markets. In 1983, according to the Federal Reserve Bank Survey of Consumer Finance conducted every three years, the figure was 19%; by 1995, the latest year for which official numbers are available thus far, the proportion had increased to 41%. With private investors often looking for cheap stocks which they suspect may go up, it seems it will take an unusual – and unforeseen – event for Conway’s dream of more ‘realistic’ evaluations to come true. As for PeopleSoft’s price/sales ratio? 3.8 – so it’s not surprising Conway has recurring dreams.
This article first appeared in Computerwire’s weekly M&A Impact news and analysis service.
