NEWSWIRE - February 28, 2002
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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