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Bambi's Internet Plays

02/14/2003 12:00 am EST


Bambi Francisco Roizen


"The war jitters are driving some investors into the perceived safety of old guard tech names, viewed as safe havens," notes Bambi Francisco . "But I believe the tech sector is still fraught with innumerable negatives. Since 2000, the group is in denial, blaming everything--Enron, scandals and 9/11--but its own maturity. The latest scapegoat is the war." Yet, the Internet editor of sees potential long-term value in select Internet names.

"At the start of January, the largest NASDAQ names traded at 52 times trailing earnings and 7.7 times sales; in comparison, in 1990, these tech stocks traded at 16 times earnings and 2 times sales. When the market unravels--and it will--and you have to select stocks, I'd be more compelled to look at Internet names. They’re the survivors, like EBay (EBAY NASDAQ) or search-related companies, like Overture (OVER NASDAQ). Sure, valuations are high, companies are operating in the same moribund economy, and Internet penetration is pretty high, with numbers showing that 70% of Americans are online. But, for the remaining Internet company survivors, valuations have always been high.

"EBay trades at 56 times this year's earnings. But it had price-to-earnings ratios of 112 and 220 times at the start of 2001 and 2000, respectively. Back then, EBay had a market between $12 billion and $13 billion, and now it's $23 billion. The compelling story about the Internet, besides the fact that there are fewer companies, is that more people are spending time online. Internet users are averaging 11 hours a week, up an hour from last year. The Internet is also cutting down the time people used to spend watching TV, according to a UCLA study. And nearly half of the 30% of Americans who do not use the Net, say they are likely to go onto the Web within a year. And the reason people are staying online is to communicate, buy products, and search for information. Two percent of retail sales were generated on the Web last year, up from 0.7% in the fourth quarter of 1999, according to ARS, Inc. And the more people stay online to search, the more advertisers are willing to place their ads on the Web. In online advertising, 286 Fortune 500 companies launched an online ad campaign in the last quarter of 2002, up from 270 in the same period a year ago. It's stats like these that make this group worth another look.

"At $70-plus, I'm obviously not the only who believes EBay's strong story. After all, the company is what the Web is all about--matching buyers and sellers. It is actually a booming city unto itself--an EBay ecosystem, if you will. It keeps the infrastructure up to speed, provides schools for EBay business owners, manages demand and supply, and polices what's bought and sold. If you have to consider one firm that's a beneficiary of the Internet, and one that will rise above the ashes, this one becomes more compelling every year. What about the risk for another recession or a prolonged slump? Well, we've already seen that EBay thrives in good and bad times.

"Take another example of net strength. Overture, it has a unique way of bringing buyers and sellers together as well. As a paid-search vendor, it's assembling advertisers and putting them in front of consumers through its partnerships with the major portals, like Yahoo and MSN. Yes, there are competitive concerns, and margin pressures. I also wonder if $1.3 billion (its market cap) is too rich for what could turn out to be a dynamic phone book. But Overture, at $22, is trading at 9 times cash flow vs. radio media stocks that typically trade at 15 times cash flow, general broadcasting shares at 11 times and outdoor advertising at 13.8. The recent sell-off due to the departure of one mid-level manager seems premature. I may have to pinch myself for being upbeat about the Internet. Most readers are telling me that all these stocks are overvalued. I agree they are. But at least they've got one thing going for them: an immature market as more people consume and conduct business online."

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