NEWSWIRE - February 29, 2000
Topic: Equity Valuation, Value-Based Management
Source: "Ten Pointers for Investing in Internet Stocks," by Alfred Rappaport, Wall Street Journal, Thursday, February 24, 2000, page R1.
Synopsis of Article: Internet stocks have recently generated tremendous returns and controversy. The Internet industry generated a one-year return of 161% in 1999. However, many market watchers are skeptical of the values of many of these companies. As the article notes, Federal Reserve Board Chairman Alan Greenspan has said, "Investing in Internet stocks is like playing the lotteries. This article, by well-known finance professor and management consultant Alfred Rappaport, presents ten recommendations for assessing the value of internet stocks. These are: 1) Evaluate companies not the Internet, 2) Focus on cash flow, 3) Forget traditional yardsticks, 4) Beware of proxy measures, 5) Estimate the performance needed to justify today’s stock price, 6) Assess the ‘real options’ premium, 7) Estimate the performance needed to justify the target price, 8) Don’t overlook the cost of employee stock options, 9) Beware of stock-price risk, and 10) Diversify your Internet bet. The article offers the opportunity to discuss how Internet stocks are valued.
The article appears in a special section of The Wall Street Journal that is presented annually. The section analyzes the best and worst performing companies, using a measure developed by LEK Consulting. The article also provides an opportunity to discuss value-based management, and performance metrics such as EVA.
Questions:
- What is free cash flow and how does it affect the value of a company?
- How can a free cash flow valuation model be used to analyze the
expectations embedded in a stock’s price?
- What are real options and how do they impact value?
- What is value-based management?
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