- guardian.co.uk, Wednesday 15 March 2000 00.00 GMT
Yesterday's frenzied debut for Lastminute.com once again raises a question that may never be properly answered: how much is an internet company really worth?
To many people a share is worth what the financial markets think it is, no more and no less. That would make Lastminute "worth" every penny of the £800m at which the total value of its shares were trading at one point yesterday. And no one can say investors were hoodwinked. They flocked to buy the shares despite the descant sung by analysts that they were overvalued.
The new company's £800m market capitalisation compares with actual revenue (not profits) of only £409,000 in the most recent quarter. So, if you purchased the entire company for £800m, then on annual revenues of £1.63m, it would take you nearly 500 years before revenues would cover your purchase price. And that's an unreal calculation because all of the revenue and more is being eaten up by costs.
The usual way of assessing a company's status by expressing market capitalisation as a multiple of earnings (post-tax profits) has fallen out of the window. You cannot say a web company is worth 15 times its earnings because web companies do not make profits.
Instead, analysts have devised two new yardsticks. The first is to express the market worth of rapidly expanding companies like Amazon.com or eBay.com as a multiple of present or future revenues. But this gives no indication of the quality of revenues - whether they are earned as commissions on sales or completely eaten up by marketing and infrastructure costs.
The second way - very fashionable - is to divide the market capitalisation by the number of customers. This is also used to justify takeover bids. Thus Vodafone's recent take over of Mannesmann meant that Vodafone was paying £7,850 for each customer.
But mobile phone companies have a stable customer base. The same criterion ap plied to a dot.com's customer base is dodgy because many of the customers may have registered but not be active buyers. As soon as they see something cheaper elsewhere they will be off at the touch of a mouse button.
Fortune magazine found wide variations in the valuation of dot.com companies by their customer base ranging from $244 for Lycos, the internet portal, to $4,562 for Charles Schwab, the online stockbroker which takes a commission on sales.
Internet valuations are difficult because no one knows how profitable web companies will be. Everyone accepts that the internet will change the world and transform business-to-business transactions (which get less publicity but account for nearly 80% of all internet business transactions). But in the area of business-to-consumer the very nature of the internet makes it difficult to make big profits. There are lower barriers to entry - as soon as a business looks good others can pile in. More important, it is a consumers' not a producers' paradise because people (and robotic agents) can surf the web for cheaper prices).
The majority of (traditional) new businesses fail within the first few years of corporate existence. The casualty rate for web businesses is likely to be greater because of the deflationary characteristics of the web and the fact that it has attracted lots of young, inexperienced people.
Some of them will become exceptionally successful. But picking the winners is very difficult not least because in new-technology situations the real winners often come in the second wave, not the first. Meanwhile investors are running like lemmings to the cliff edge despite regular warning signs on the way.
