The Market (Still) Makes Me Cry

Stanford University professor Ezra Zuckerman has told us all something we suspected all along. No one really knows how to evaluate Internet stocks. After interviewing several analysts and some company officials, he told Reuters the process is “arbitrary, often regarded as more of an art than a science.”

Basically, Zuckerman is puncturing the balloon about “metrics” (evaluation tools) such as multiples of revenue, customers, members, or how much customers are trading for that have been used to “evaluate” Internet stocks throughout this boom. They’re nonsense, he’s saying, and they often conflict with each other. Analysts are just sticking on justifications for opinions.

That’s not the worst news, not at all. The worst news is this. The press can move Internet stocks. That’s right, people like me, the one group of people whose ethics make them least likely in the world to buy Internet stocks, can make them change in price. (Yes, this does put the report of a San Jose Mercury News reporter being demoted for taking stock in a company she covered into a new light.)

Of course, for those who’ve never urged you to enjoy the party (like myself), this also puts the recent fall in Internet stocks into a new light. Most of these companies still aren’t turning a profit. Many of them still have very low levels of sales. While they’ve fallen in price, they still can’t be evaluated in the old, time-honored ways–based on earnings.

In this environment, even celebrities who may know less about stocks than I do can move a stock. Let’s take one example from this week’s news, TheGlobe.com.

The Globe’s stock has had a hard time recently, but the company behind it had total sales of just $3.2 million for the quarter ending in March, and it’s never made a penny. Yet even at its recent price of $10.50 per share, The Globe was valued at $277 million.

So what’s the big news from The Globe that’s going to move the stock? This week, they reached a deal with Dan Marino to put together an official Dan Marino web site, with chat and forums and interactive games. (Marino managed to save his name, www.danmarino.com, which now resolves to the new The Globe address.)

Now, the Dolphins make me cry, too, but how much money is this really going to be worth to shareholders? My point isn’t to knock Dan Marino or the TheGlobe.com. (Honestly, I chose them entirely at random for this story.) But the stock ticked up on the Marino news. Maybe The Globe can draw $1 million in ads from the site–assuming the Dolphins do well. But is that material going to change the company’s fundamentals?

Only on the Internet would we be asking those kinds of questions. That scares me. Does it scare you?

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