1. Internet Stocks Are Internet Stocks Fairly Valued? Carlos Carvallo, Naji Ghazal, Jody Goodall Scott Huxtable, Heiko Ziehms NO!

2. Overview Present Market Capitalization's are too high Internet Growth  Profitability Historical analogy

3. Present Market Values* *Market Capitalization as of 5/3/99

4. What is Value? “Value today always equals future cash flows discounted at the cost of capital” Brealey / Meyers, Principles of Corporate Finance, p. 73 All other valuation techniques are estimations or shortcuts (Steve Harmon et al)

5. What is Fair? Today’s market capitalization must be justified by realistic future cash flows

6. Example: eBay Valuation eBay requires a growth rate of 300% a year for five consecutive years to justify their present Market Value of $24 billion Analysts average growth rate forecast for eBay over this period is 54% eBay’s gross profit margins have actually decreased for the past three years

7. Analysts’ Valuation *assumes very conservative 17% discount rate *growth rate forecasts from Yahoo! Finance *Source: Group A White Paper

8. New Medium - No New Rules Growth of the Internet does not necessarily imply growth of profit for these companies Low barriers to entry Increasing competition Minimal switching costs Decreasing profit margins

9. Reality Check - Amazon If amazon sold every book in US in 10 years time they would still not justify even half of their valuation. 2008 book sales $16 Billion Amazon requires income of $63 Billion (BusinessWeek) a lot of cd’s

10. Even eBay knows the truth eBay ”We may not retain profitability”. (10-K) 11/15 Internet companies lose money –why should this change so much

11. Growth

12. Historic Bubbles Previous experience shows that the market can’t sustain such hyper growth based on momentum and irrational euphoria. Bio-Tech in the late 80’s and early 90’s Railroad and Radio in 19th Century

13. In Conclusion Growth needed to achieve required future cash flows is practically unobtainable Internet Growth  Profitability History shows all bubbles burst