Peter Martin - A taste of his talentsDefinitive proof of the scale of the Internet craze comes in the $1.1bn market capitalisation briefly accorded last Friday to Yahoo, an electronic catalogue of the World Wide Web.
So egregious is the overvaluation - Yahoo's mid-day market capitalisation yesterday was $681m - that it is hard to convey in the FT's sober prose. This is a company with total revenues of around $3m since its launch in March 1995, giving it a price/revenue multiple of 340. There is no price/ earnings ratio: has achieved an operating profit ($62,000) in only one of its four quarters. It is run by Jerry Yang and David Filo, who until two years ago were graduate students at Stanford University; they have no previous business experience.
It is not surprising that there is a flourishing Internet discussion (in the alt.investments.misc newsgroup) headed "Yahoo: how to short", in which eager participants examine the best ways to sell the stock short and profit from its expected precipitous decline in price.
The performance of Yahoo's shares is partly a reflection of the extremely limited stock available to the public - only 10 per cent of total shares outstanding. It is also a legacy of the Netscape offering last summer. Those who felt that stock was overpriced at its initial public offering level of $28 in August were confounded when it rose above $160 by early December and then - after a two-for-one stock split - settled at $54, a 289 per cent premium on its flotation price. Those who scoffed then look foolish; those who shorted the stock lost their shirts.
Yet there is a fundamental difference between the two companies, which both explains Yahoo's more spectacular performance, and makes it still more implausible. Netscape makes software to allow computer-users to browse the World Wide Web or provide information across it. When you buy stock in Netscape, you are doing so in the belief that it will be another Microsoft. Netscape is distinguished from other software companies merely by the scale of its ambitions and the speed and aggressiveness with which it is pursuing them.
Yahoo is an entirely different proposition. It is itself a site on the Web, which acts as a guide to all the rest. To use it, you browse through a hierarchical menu of subjects, starting with 14 top-level categories such as Economics and Business, and going down through levels that lead you through some of the 16,000 ever more precise sub-categories, until eventually you find the web site you seek. Alternatively, you can type in the word you are looking for, and will search the whole of its catalogue, or any of its specific categories, to find sites that contain that topic.
The company gets its revenues mostly from selling advertising on its pages. It can thus be compared with a billboard company - which makes the valuation even more extreme. The total US market for billboard advertising in 1994 was less than $1bn; the total revenue of all World Wide Web advertising this year is estimated at $300m..
But of course, the value put on Yahoo reflects more than just those sober numbers. It is, in effect, a bet on the newest category of asset: cyberspace real-estate. As in all great land rushes, it is driven by the belief that they just aren't making lakefront property any more..
The trouble is that they are making more cyberspace property: it is infinitely extensible. Already, there are many alternative ways of searching the web, some with superior technology, others with a wider reach. Digital's Alta Vista site, for example, indexes 6bn words on the Internet, including not just web sites but also long-defunct discussion groups; it does so using its latest, extremely powerful, Alpha computers.
Part of Yahoo's appeal lies in the belief, however, that it has a significant first-mover advantage. Its supporters argue that, as the first widely accessible search engine, it has built up a unique brand- name and momentum, attracting a million visits a day in February this year.
On this view, the ever-expanding scale of cyberspace, far from threatening , makes it increasingly valuable. To make sense of the electronic universe, you need a reliable guide. is not only the best-known of such guides, it has also built up a distinctive structure to its index, which it rather pretentiously calls its "ontology".
This classification scheme, some argue, will prove a long-lasting asset, protected by the intellectual property laws or at least by the effort required to duplicate it. Perhaps. But it is hard to see the Dewey Decimal Classification - another "branded navigational gateway", to use the language of Yahoo's prospectus - attracting a $700m capitalisation.
The branding issue is a more serious one. has undoubtedly created a valuable brand from scratch, one which is already being extended to other areas - a book, a magazine, overseas licensees and so on.
Yet brands are more than well-known names, otherwise such brands as Vimto or Studebaker, once nationally famous, would not have dwindled into comparative or complete commercial irrelevance. They reflect also the core benefits that the product provides, and the way in which those benefits are delivered to the consumer. It is in this area of benefits that is most vulnerable from aggressive competitors who offer superior editorial selection, wider reach, better technology, a more specialised focus or a superior index structure. Threats of all these sorts are in evidence; and their imminent arrival will only be hastened by the price-tag has achieved.
Perhaps the most telling comparison is with another Internet-related deal of the last few days: the sale of RSA Data Security for roughly $200m in stock to a company called Security Dynamics. RSA was founded over 10 years ago to exploit the computer security systems devised by three academics, Professors Rivest, Shamir and Adelman. They had invented a practical way of using a new form of cryptography on which much of the Web's future and planned security is based. RSA's work allows customers to send their credit card numbers across the web in safety; and it permits messages and transactions to be properly authenticated.
RSA has strong patents and many years of building up valuable expertise in applying them. It has revenues in the first quarter of 1996 of $12m and net income of $2.5m. It is also by far the best-known brand in its field. Yet it has gone for a fraction of the value attributed to Yahoo.
The difference in these two values surely lies in the different nature of the brand, and the infinitely malleable nature of human expectations. Yahoo is an end-user brand that offers a stake in the ever-expanding acres of cyberspace. Its value is as great or as small as you wish to make it. RSA, by contrast, has a known history and a predictable future; and it sells its products to other businesses rather than to end-users. When it comes to the crunch, a consumer franchise always seems more valuable than a technological or business one; and an unknowable future more seductive than a quantifiable past.
The last of the century's great real-estate booms is under way in cyberspace . Some people will get extremely rich in the process; as in all such booms, they may not always be the most deserving cases. Others will see their hopes, hard work and savings rendered valueless by the vagaries of taste and location. In such booms, however, one thing is certain: after the ups and downs, the triumphs and the bankruptcies, the property gets developed and the frontier days are left behind. The residents of Florida retirement communities - or the Scottish financial grandees who inhabit Edinburgh's 18th century New Town - scarcely remember the speculation on which their community was built. So it will be in cyberspace.
Additional research by Rivka Nachoma.
