Making Money in Technology
After the Bubble, page 12
The Amazing Hulks
One by one the amazing hulks have been taken out and shot. For example, Yahoo has declined
from a high 170 to below 20 because advertising on the Internet is ineffective. Amazon has declined
from the hundreds to the teens because “losing money on every order but making it up on the volume” is
a good joke but not a good business model. Cisco’s market capitalization has been cut in quarter because
acquiring companies for their technology worked better in boom times than now.
One implication is that if these business models don’t work for the large-scale amazing hulks,
they won’t work for much smaller companies either.
How can you determine if a company is an amazing hulk, or the real thing?
This is a good question—it is much easier to see empty hulkdom in hindsight. You can ask yourself
some simple questions to evaluate the business: does the business model make common sense? Is the
current valuation supportable using a discounted future cash-flow model? Admittedly, with technology
companies, using this formula can produce companies with high current price earnings ratios. In fact,
earnings may even be nonexistent. With a technology company, this does not necessarily imply lack of value.
Do customers like the product? Are they buying it? Are there any huge one-time write-offs, and, if so,
why shouldn’t these really be treated as part of the profit-and-loss statement?
Are there any amazing hulks left out there? In my opinion, the answer to this is, “Yes.” But, they are
harder to find than they were in March 2000. The easy short-side pickings are gone.
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