Australian 'Net God' Refuses to Profit From IPO

Lansdowne writes "Robert Elz, a 'mildly eccentric' programmer in the CS department of Melbourne University and the administrator of the .au domain, refused to take part in last week's A$93 million IPO of Melbourne IT, the university's commercial arm. He has been quoted as saying that administrators should not financially benefit from registering domain names. Melbourne IT registers .com.au names as the Australian equivalent of NSI. Read the Sydney Morning Herald's story for the scoop. "

TLD Worth $136M ? ? I think not

Robert Elz will prove to be correct in the long run. The article points out that Melbourne IT is now listed at 136 Million dollars.

Now I can see that it's not just the USA stock market that laughably overvalues it's internet stocks, in fact, the entire world overvalues anything that has to do with the practice of internetworking computers (a 30+ year old technology).

The internet bubble will adjust it's valuation (read:crash) and people will wake up to find they invested there life savings in a Pentium II on a fractional T1 in the university janitors closet.

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Re:TLD Worth $136M ? ? I think not

Alan Greenspan, chairman of the US Federal Reserve (Central Bank) who is relatively conservative when it comes to asset valuations has made very interesting comments regarding the "internet bubble".

When asked about it in front of a US Senate Finance Committee meeting, especially if he viewed it as a destabilizing financial factor he stated the following (I am working from memory here so don't fry me I get some details wrong).

1. The internet is having a measurable and strong effect on improving economic efficiency and worker productivity in the US.

2. It is quite clear that the internet is in its very early stages in terms of its economic growth and effects on the economy. In particular investments that are being made in internet infrastructures in the US are huge by any standards, and will have an inevetable impact in the shape of the economy for many years to come.

3. Taken in these terms, the total valuation of internet stocks measured against the current value of the existing and net present value of potential economic activity is at appropriate levels even by relatively conservative estimates, and may in fact be undervalued.

4. Participation in existing internet equities is very risky because at this stage as it is impossible to predict who the winners will be. However the valuation levels of the sector as a whole are appropriate and do not have any real potential to destabilize the stock market. In early growth situations like this investing in equities is similar to placing bets at a horse race - you have poor odds of picking a winner, but there will be a winner, and those who choose the winner will be handsomely rewarded.

So Mr. Greenspan, based on a fundamental economic analysis thinks there is no internet bubble; a rather startling conclusion to those who are looking at stock valuations in the present atmosphere. He does however warn that picking a horse to ride may be very risky business.

So - should you buy AOL stock? Probably not. But should you buy an internet mutual fund? Probably yes, especially if you have an investment time horizon of five years or more.

For a contrasting view ...

... take a look at this article [smh.com.au]. This highlights the contrast between the traditional bread earners and the so called new IT revolution. One needs to question what is wealth creation or even the definition of profit. The capitalisation of a company is nothing more than the expected discounted income stream plus expected growth. Hence if a company is valued at say $1 billion, shareholders expect a company to earn at least that much in profits (or revenues in the case of .com fluff) over a period when it is deemed to have a competitive edge. For some strange reason the assumption is that share price is roughly analogous to dominance in market share (ie the number of customers you "own") which seems a little presumptious considering that with the reduction in transaction costs, there may be multiple paths/sources to obtaining the same good or service. Thus as soon as a new competitor arrives, the share price drops to indicate a dilution of the market. Why would an IT cartel have such a high "value" compared to a farm which produces so called essentials. Basically it relates to the laws of supply and demand and people mistaking a trajectory which they assume continues forever. Domain name registrations will slow down once every business and person has an account (or we run out of recognisable letters). Once the marginal costs reduce down to the actual operating costs of renewing a site, then you will see some serious cash-flow hiccups along with brutal competition to keep others from poaching your customers. and then maybe it might be smart switching your vaporcash into a real farm. IT companies only have growth potential so long as their products result in improved productivity and capabilities. Once the stress and pain becomes too much (as in the case of a not-so-popular OS) then people start resisting. The real competition to software is not other players but your historical software and customer habits. People tend to underestimate the risk premiums in share prices and until a crash or two happens to kill off the ignorant, rationality won't return to the share-market. Also, it would help if politicans [brw.com.au] kept their meddling hands out of the pot.

LL

Re:Valuation

. . .When Mr. Greenspan talks, people listen, but people should listen closer.

Your quote of the 1st. point he made, I agree with completely " The internet is having a measurable and strong effect on improving economic efficiency and worker productivity in the US". Email instead of faxes, the publish/subscribe information model, and the low barrier to entry result in measurable increases in productivity. However, these advances in the business model are only advances while a difference between companies exists. It's the last point, the low barrier to entry, that will render this market influence ineffective. Even the most casual enterprise (read:the late 90's .com rush) will dilute the .com brand name, and the marketing buzz that goes with it.

On the 2nd point: "It is quite clear that the internet is in its very early stages..." is exactly the kind dangerous thinking that leads to overvaluation. Pump it out on TCP/IP and buy a little advertising time for your domain and you're at the forefront of a new economy? I just don't see it. I just don't understand the growth projections being as high as they are. maybe I'm to close to the tech to see the big picture, but I just don't understand the value of a companies IT department taking the company BBS and slapping a HTML front end on it accounts for "having an inevitable impact in the shape of the economy for many years to come."

The 3rd point: "... and may in fact be undervalued." are based on future projections of internetworking penetration and usage. It's an interesting observation, and may well be true, but there's that old market warning "past performance is not indicative of future performance" that could be aply applied in this case.

I think VALinux is Proof that the tech sector is overvalued by people not close to the tech, overvalued by people not even vaguely familiar with the companies ability to make a return on there investment. It's like betting on a horse based on his position in the starting block. The false perception that internetworking is something new is forcing companies to concentrate on 'position position position' instead of actually applying the tech to make a buck.

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a little side tangent...

Has anyone noticed the stark parrallels between todays stock market conditions and those of just pre-great depression conditions? Stocks that are not actually making any money and usually are losing it are being offered to the public and being sold for hundreds of millions of dollars... It's pretty common knowledge, in the geek circles I move through at least, that pretty soon somebody is going to realize that none of these companies are making money, and pretty soon everybody is going to realize it, and then what happens? The soaring stock market begins to drop, like an investor out a window. Also, just before the big crash back then, all the analysts were saying things like 'This is the most prosperous time in America ever! By the looks of things, this upswing will never end!'. But it did. And I think it's going to again. So in a round about way, it's probably just as well that Elz didn't take the money, it'll probably be worthless in 3 or 4 months anyway.