Digital Matters - Issue 34

On February 2, Amazon.com announced that it had lost a record 323 million in the fourth quarter of 1999. That night in the aftermarkets and well into the next trading day, shares of Amazon.com traded up as much as 33%, once again prompting the Internet question of questions: What's up with that?

The sharp rise in Amazon's stock price following the release of ugly financial results reinforced many people's belief that the markets have lost touch with reality. Publications such as Barron's and Fortune have been arguing for years that the Internet bubble is bound to burst. And with each "dotcom mania" anecdote, they bang the drum louder. But all the while, the markets and the Internet-technology indexes have continued their heady ascent. If you believed what you read in Barron's, you would have left 8,000 points of upward Dow movement on the table and missed the extraordinary run-up of the NASDAQ.

For a vast new group of investors, today's financial markets offer the opportunity to achieve unprecedented wealth. And taking advantage of that opportunity boils down to correctly answering a fairly simple question: Do you think that Yahoo! is worth four times what the Gannett Co. is worth? Gannett, an old-economy media conglomerate that publishes a bunch of regional newspapers as well as USA Today, operates those properties at high margins, has strong revenues and a very positive cash flow, enjoys tidy profits -- and, in late February, had a market capitalization of nearly $20 billion.

Yahoo!, a new-economy Web company, has decent revenues, a positive cash flow, good profits -- and (also in February) a market capitalization of more than $80 billion. On paper, Gannett is "worth" more than Yahoo! But the stock market isn't about paper; it's about the future. People who buy stock aren't betting on what has happened. They're betting on what they think will happen.

The smart money on Wall Street is betting that the future will look radically different from the present. Investors look at Gannett and see all of those journalists and all of those delivery trucks and all of those "giveaway" marketing programs and all of those classified ads migrating to the Web. They're betting that five years down the line, the combination of those factors will cap Gannett's growth. In the words of one media analyst, "It's a dead-tree business -- 'dead' being the operative word here."

These same people can hardly contain themselves when it comes to Yahoo! It's a credit-card business, it's an auction business, it's a content business, it's a shopping-service business, it's a bill-paying business: It's a galaxy of services and opportunities. And every month, more than 120 million people click their way through Yahoo! to do whatever it is that they're doing. Using a standard multiplier ($1,000 per customer), the Wall Street wizards have come up with a figure of $120 billion. Employing the same multiplier that AT&T used when purchasing MediaOne (roughly $5,000 per customer), that figure rises to $600 billion -- more than seven times the February selling price of the stock. To borrow the immortal phrase of America's favorite British action hero: "Yeah, baby!"

As crazy as the stock market sometimes seems, we're on the doorstep of another wealth-creation technology that will make today's market valuations and fluctuations seem rustic. A few years from now, we'll look back on dotcom mania as a model of investment sanity and prudence.

The global economy is entering the dawn of the genomics revolution. It is possible that by the time you read this, the entire human genome will have been sequenced by a company called Celera Genomics (whose parent company is PE Corp.). Once the human genome is sequenced, scientists all over the world will go to work on pairs of genes whose instruction sets lead to such physical ailments as heart disease, high blood pressure, stroke, or cancer. Once the source code of, say, cancer is understood, pharmaceutical and agriculture products can then be created to delay the onset of the disease or to erase its code altogether. What's the value of that?

The value of that is the value of your life. Celera Genomics hit the New York Stock Exchange as a tracking stock in May 1999. It went out at about 20, spiked, and then languished at 15 for a couple of months. At the end of February, it sold at a split-adjusted 200 a share. There are people on Wall Street -- serious traders -- who believe that it will eventually be worth $10,000 a share. Among those companies heavily invested in Celera Genomics are Janus Capital Corp., Putnam Investments, the Vanguard Group, and a dozen more of the nation's leading investment firms.

Look at the genomics revolution in the context of agriculture. About half of the European Union's budget, for example, is set aside for agriculture. The EU opposes genetically modified foods, in part because it has some concerns about the biosystem and in part because of constituency politics.