Technology Valuation and Stock Market Efficiency
Amazon and Yahoo are two internet or “new economy” stocks that are listed on
NASDAQ. Microsoft and SAP AG are two software producers. SAP AG (listed on
Frankfurt and NYSE) is in fact the largest European software provider. The purpose
of this case is to examine the stock price behaviour of these four companies to
identify whether the movements in stock prices of these securities are consistent with
the Efficient Markets Hypothesis.
Attached are some pieces of background information on these four companies: their
corporate profiles and financial information. In addition there is some accounting
information, and also share price information since they were first listed on an
exchange.
In an unstructured case analysis it is up to the student to decide what are the important
questions. But here are some hints.
The basic question is: Was the US Economy guilty of “Irrational Exhuberance” in
2000?
How does this tie in with Lakonishok, Shleifer and Vishny (1994) finding that
glamour stocks tend to be overvalued and value stocks undervalued?
Here are some other related issues you should consider
- Do the stock price movements of Amazon, Yahoo Microsoft and SAP exhibit
patterns?
- At any point in the companies’ histories, at the time could you have predicted
where prices were going to move in the future?
- If you had subscribed to these companies when they were first listed, for how long
would you have held these shares?
- Was either Amazon or Yahoo over/undervalued on 01/01/99, 01/01/00, 01/01/01?
- Why did Amazon’s share price peak initially in April 99?
- Why did SAP’s share price peak again in October 2000?
- Which company offers the best long-term (short-term) investment?
- If you were advising the trustees of a pension fund, would you advise them to hold
shares in any of these companies?
- What are the effects of a high stock market valuation for a company?
- What are the effects on the economy in general of a company or a sector having a
high market value?
Case Documents
-
Plot of US S&P Composite 1871-2000
Newspaper articles on valuation of internet stocks in November and December
1999
Plot of indices Nov 1999 – Nov 2000
Microsoft: Datastream profile 09/01/01, Yahoo Finance profile & Research
SAP AG: Datastream profile 09/01/01, Yahoo Finance profile & Research
Amazon: Datastream profile 09/01/01, Yahoo Finance profile & Research
Yahoo: Datastream profile 09/01/01, Yahoo Finance profile & Research
Newspaper article on SAP’s results 09/01/01
Newspaper article on Amazon’s results 09/01/01
Background details on Amazon, Yahoo Microsoft and SAP AG.
Yahoo Business Summary
Yahoo! Inc. is a global Internet communications, commerce and media company that
offers a comprehensive branded network of services to more than 120 million users
each month worldwide. As the first online navigational guide to the World Wide
Web, www.yahoo.com is a major guide in terms of traffic, advertising, household and
business user reach, and is one of the most recognized brands associated with the
Internet. The Company also provides online business services designed to enhance its
clients' Web services, including audio and video streaming, store hosting and
management, and Web site tools and services. Under the Yahoo! brand, the Company
provides broadcast media, communications, and commerce services.
Yahoo Financial Summary
Yahoo! Inc. is a global Internet communications, commerce, and media company that
offers a branded network of services to millions of users daily. For the nine months
ended 9/30/00, revenues totalled $799.3 million, up from $388.6 million. Net income
totalled $168.6 million, up from $10 million. Results reflect an increased number of
advertisers purchasing space, growth in average page views per day, a reduction in
acquisition costs and increased investment income.
Company Profile: Yahoo! Inc.
NASD : YHOO
Sector: Technology
Industry: Computer Services
Yahoo! Inc., incorporated on March 5, 1995, is a global Internet communications,
commerce and media company that offers a comprehensive branded network of
services to more than 120 million users each month worldwide. As the first online
navigational guide to the World Wide Web, www.yahoo.com is a major guide in
terms of traffic, advertising, household and business user reach, and is one of the most
recognized brands associated with the Internet. The Company also provides online
business services designed to enhance its clients' Web services, including audio and
video streaming, store hosting and management, and Web site tools and services.
Under the Yahoo! brand, the Company provides broadcast media, communications,
and commerce services.
Products and Media Properties
The Company's principal offering, www.yahoo.com, provides the flagship product for
its global Internet media network. Yahoo! offers a comprehensive, intuitive and userfriendly online guide to Web navigation, aggregated informative content,
communication services, a strong user community, and commerce. Yahoo!m
organizes Web site listings under the following 14 principal categories: Arts and
Humanities, Business and Economy, Computers and Internet, Education,
Entertainment, Government, Health, News and Media, Recreation and Sports,
Reference, Regional, Science, Social Science, and Society and Culture.
The Company has developed Web-based media properties that allow the user to
personalize and tailor the presentation of information and navigational resources. The
Company also has developed a suite of communication and commerce services that
facilitate interaction with the Yahoo! community, the greater Web community, and
transactions among users and with merchants.
Yahoo!'s Media properties focus on delivering information and entertainment
conveniently to users from leading branded content providers, combined with other
Yahoo! resources and related Web sites from the Yahoo! directory.
The Company has developed properties organized around subjects such as Sports,
News, Weather, Music, and Finance. Yahoo! Entertainment aggregates information
about recreation and leisure activities as well as interactive experiences through
properties such as Yahoo! Movies, Music, TV, Games, and Chat Events.
With its acquisition of broadcast.com, Yahoo! significantly accelerated its efforts to
augment its properties with rich media in the form of audio and video content, and to
offer services to its corporate customers for live and on demand online events.
Through its integrated Chat service, Messenger, Message Boards and Greetings,
registered Yahoo! members can contact each other as well as communicate with
the Web community at large. Yahoo! Mail, the Company's free email service, is
one of the most popular on the Web. Yahoo! also has developed a suite of services
that help users manage their personal information, such as Yahoo! Address Book,
Yahoo! Calendar, Yahoo! Briefcase, and Yahoo! Phone Book.
Through sponsorship arrangements with premier merchants, Yahoo! offers its
members the opportunity to purchase a wide variety of goods and services such as
automotive services (Autoweb.com), books (Amazon.com), brokerage services
(E*Trade, TD Waterhouse, and National Discount Brokers), flowers (FTD, Gerald
Stevens), health care (Health Network, Healtheon/WebMD), mortgages (E-Loan),
music (ARTISTdirect), traditional communications services (AT&T), and weddingrelated products and services (WeddingNetwork, WeddingChannel.com).
The Company has developed 21 international online properties in 12 languages,
including localized versions of Yahoo! in Asia (English language), Australia & New
Zealand, Brazil, Canada, China, Denmark, France, Germany, Hong Kong, Italy,
Japan, Korea, Mexico, Norway, Singapore, Spain, Sweden, Taiwan, and the United
Kingdom & Ireland and Yahoo! guides in Spanish and Mandarin Chinese languages.
Outside the English-speaking markets, the Company has built independent directories
of local language Web sites and other content, developed by native speakers of each
language.
Yahoo! Get Local offers extensive information for all 50 states, 211 metropolitan
areas and more than 30,000 counties and cities in the United States. The property
provides users with comprehensive local Web programming, including sports,
weather, news, yellow pages, white pages, entertainment, community information and
more.
The Company continued its agreement with Ziff-Davis Publishing Company,
affiliated with SOFTBANK, for the publication of Yahoo! Internet Life, a monthly
print magazine companion to the online magazine. The publication was recently sold
to Willis Stein & Partners. In addition, the Company has entered into a multi-book
arrangement with Byron Preiss to publish Yahoo! branded Internet reference guides.
Advertising, Electronic Commerce, and Business Services
The Company derives significant revenues from the sale of advertising elements
including placement fees, promotions, banner advertisements, sponsorships, direct
marketing, and transaction fees generated from the sale of merchandise on Yahoo!
properties. The Company's advertising products currently consist of banner
advertisements that appear on pages within Yahoo! properties, higher profile
promotional sponsorships that are typically focused on a particular event, such as a
sweepstakes, and merchant sponsorship buttons on targeted advertising inventory
encouraging users to complete a transaction.
The Company offers many forms of advertising with varying price ranges. There are
targeted and general rotations of banner advertising. In addition to banner
advertising, the Company offers premium positions on Yahoo! properties that
typically are used in connection with promotions and special events.
With the acquisition of Viaweb and subsequent product development, Yahoo! Offers
a technology platform directed toward the complete deployment of a commerce
enabled Web site with email, reporting, payment processing, and search functionality.
Currently, this technology is available in the Yahoo! Shopping and Store properties
enabling large and small merchants to transact online.
With the addition of broadcast.com, Yahoo! added to its business services
offerings with streaming media services, creative design, event planning and
promotion. The Company also offers an outsourced co-branded corporate portal,
based on My Yahoo!, for employees, suppliers, vendors and customers. Yahoo! also
provides hosting and commerce services with its Yahoo! Store and Yahoo! Site
services.
The Company faces significant competition from America Online and Microsoft
(MSN) and, to a less significant extent, other companies that have combined a variety
of services under one brand in a manner similar to Yahoo! including CMGI (Alta
Vista), the Walt Disney Company (The GO Network), Excite@Home, and Lycos.
America Online and Time Warner recently announced the proposed merging of their
companies.
Amazon Business Summary
Amazon.com is an online retailer that serves over 17 million customer accounts in
over 150 countries. The Company directly offers for sale millions of distinct items in
categories such as books, music, DVDs, videos, toys, electronics, software, video
games and home improvement products. Through its marketplace services such as
Amazon.com Auctions, zShops and sothebys.amazon.com, the Company has created
Web-based marketplaces where buyers and sellers can enter into transactions with
respect to a wide range of products.
In addition to its US Web site, the Company currently has two internationally focused
Web sites located at www.amazon.co.uk and www.amazon.de. The Company also has
invested in and developed strategic commercial relationships with a number of
selected e-commerce companies.
Amazon Financial Summary
Amazon.com, Inc., is an online retailer offering items including books, music,
DVD/video, toys, electronics, software, and home products. For the the nine months
ended 9/30/00, revenues increased 86% to $1.79 billion. Net loss totalled $866.1
million, up from $396.8 million. Revenues reflect growth in electronics due to
great prices and deep selection and increased customer accounts. Higher loss reflects
higher marketing expenses and goodwill amortization charges.
Company Profile: Amazon.com, Inc.
NASD : AMZN
Sector: Services
Industry: Retail (Specialty)
Amazon.com, Inc. is an online retailer that serves over 17 million customer accounts
in over 150 countries. The Company directly offers for sale millions of distinct items
in categories such as books, music, DVDs, videos, toys, electronics, software, video
games and home improvement products. Through its marketplace services such as
Amazon.com Auctions, zShops and sothebys.amazon.com, the Company has created
Web-based marketplaces where buyers and sellers can enter into transactions with
respect to a wide range of products. In addition to its United States Website, the
Company currently has two internationally focused Websites located at
www.amazon.co.uk and www.amazon.de.
The key features of Amazon.com's Websites include browsing, searching, useful
product information, reviews, recommendations and personalization, broad selection,
low prices, 1-Click technology, secure payment systems and availability and
fulfillment. The Amazon. com Websites provide other services to make online
shopping more enjoyable for the Company's customers. In its Gift Ideas section, the
Company features a seasonally appropriate selection of gift ideas and services. In its
Community section, the Company provides a gathering place where customers can
share product information and recommendations. Through the Company's e-Cards
section, customers can send free animated electronic greeting cards to friends and
family.
Amazon.com is principally organized into three operating segments. The US Books,
Music and DVD/video segment consists of the Company's US online stores for books,
music and DVD/video. The Early-Stage Businesses and Other segment consists of the
Company's US online stores for electronics, software, video games, toys and home
improvement products, US marketplace services, and the Amazon.com Commerce
Network. The International segment consists of all operations in Germany and the
United Kingdom.
US Books, Music and DVD/Video Segment
The Company currently offers an aggregate of over 13 million titles in books, music
and DVD/video. During 1999, the Company continued to enhance its Book Store by
expanding selection and improving the customer experience. The Company created
new specialty stores such as its professional and technical store, expanded its editorial
content through partnerships with experts in certain fields and increased selection
with the addition of millions of used and out-of-print titles. During 1999, the
Company's Music Store launched an improved classical musical store, enhanced its
product recommendation services and added new features to promote independent
artists via Amazon.com Advantage. Amazon.com became the first major online music
retailer to dedicate an area of its store to free, full-length song downloads from
established artists and major-label performers.
The Company's DVD/video Store enjoyed strong revenue growth in 1999. In addition,
the Company's DVD/video Store continued its integration with its Internet Movie
Database (IMDb) Website, a leading online information source for movie enthusiasts.
The Company also created and hosted the official Web site for "American Beauty,"
winner of three Golden Globe awards, and began streaming exclusive outtake footage
from motion pictures such as "The Blair Witch Project" and "Austin Powers: The Spy
Who Shagged Me."
Early-Stage Businesses and Other Segment
Amazon.com's other US online retail stores consist of electronics, software, video
games, toys and home improvement. Amazon.com's US marketplace services
currently consist of Amazon.com Auctions, zShops and sothebys.amazon.com.
Amazon.com Auctions allow buyers and sellers to conduct transactions with respect
to a wide variety of products in an easy to use auction format. Amazon.com zShops
allows individuals and businesses to offer popular as well as hard-to-find items to
Amazon.com's customers. sothebys.amazon. com is an online auction site devoted to
art, antiques and collectibles.
During the fourth quarter of 1999, these marketplace services surpassed a combined
one million registered users and 1.5 million listings. Since its launch in November
1999, sothebys.amazon. com has achieved average close rates, which are rates of
actual purchases by customers bidding at the site, in excess of 50% and average
auction closing prices of over $500. The participants in the Company's marketplace
services can use its Amazon.com Payments service, which allows individuals and
small businesses to accept credit card payments through Amazon.com's 1-Click
payment feature, thus eliminating the problems associated with checks and money
orders.
The Company has recently entered into agreements to allow selected strategic
partners to promote their products and services to its customers. These strategic
partners are part of the Amazon.com Commerce Network and currently consist of
Greenlight.com, an online source for auto purchasing in partnership with local
dealerships; living.com, an online retailer of home products and services;
drugstore.com, an online retail and information source for health, beauty, wellness,
personal care and pharmacy; Audible, which delivers spoken audio over the Internet;
Ashford.com, an online retailer of luxury and premium products; and NextCard, Inc.,
an online issuer of consumer credit cards.
International Segment
The Company has two internationally focused Websites located at
www.amazon.co.uk and www.amazon.de. Each of amazon.co.uk and amazon.de was
ranked the number one most visited e-commerce site and the number 10 most visited
site overall in the United Kingdom and Germany, respectively, according to the
Media Metrix ratings for Europe released in January 2000. Both of these sites were
launched in October 1998 and currently have product and service offerings principally
consisting of books, music, DVD/video, auctions and zShops. These international
sites have the same look, feel and functionality as the US Web site, including 1-Click
technology, personalized recommendations and product reviews, but offer content,
products and services tailored to the local market. The amazon.de Website is
presented in the German language. The Company currently has distribution centers
and customer service centers in the United Kingdom and Germany.
Microsoft Business Summary
Microsoft Corporation develops, manufactures, licenses and supports a wide range of
software products for a multitude of computing devices. Microsoft software includes
scalable operating systems for servers, personal computers and intelligent devices,
server applications for client/server environments, knowledge worker productivity
applications, and software development tools. The Company's online efforts include
the MSN network of Internet products and services and alliances with companies
involved with broadband access and various forms of digital interactivity. Microsoft
also licenses consumer software programs, sells hardware devices, provides
consulting services, trains and certifies system integrators and researches and
develops advanced technologies for future software products. The Company is
divided into three main areas: the Business Divisions, the Sales, Marketing and
Support Group, and the Operations Group.
Microsoft Financial Summary
Microsoft Corporation develops, manufactures, licenses and supports a range of
software products, including scalable operating systems, server applications, worker
productivity applications and software development tools. For the three months ended
9/30/00, revenue rose 8% to $5.8 billion. Net income applicable to Common before
acct. change rose 18% to $2.58 billion. Results reflect accelerating deployments of
Windows 2000 and higher investment income
SAP AG Business Summary
SAP AG is a leading provider of inter-enterprise software solutions that integrate the
processes within and among enterprises and business communities. SAP's primary
product, mySAP.com, comprises the products, services and solutions that SAP
delivers for processing business transactions collaboratively. Enterprises and
organizations of all sizes and in all sectors can use mySAP.com to completely
integrate their employees, their customers and their business partners into their
business via the Internet. The mySAP.com solutions platform is the hub around which
existing products are continuously improved, and new development initiatives and
technologies are rapidly turned into the applications that the market wants. This
includes work on the SAP R/3 components, the 19 industry solutions, and, above all,
e-business applications such as E-Commerce with mySAP.com, Customer
Relationship Management with mySAP.com, Business Intelligence with mySAP.com
and Supply Chain Management with mySAP.com.
SAP AG Financial Summary
SAP AG is an international developer and supplier of integrated business application
software designed to provide cost-effective comprehensive solutions for businesses.
For the nine months ended 9/30/00, revenues rose 19% to EUR4.1 billion. Net income
fell 9% to EUR260M. Results reflect the addition of new mySAP.com customers and
increased maintenance revenues, offset by increased sales and marketing and
development expenses.