So will the head of PurchasePro.com (Nasdaq: PPRO) tell us when he sells $1 million of stock in his company?
After all, that would be about as significant as today's announcement that PurchasePro chairman and CEO Charles E. Johnson Jr. will buy that much stock. Which is to say, hardly significant at all.
Yet the gesture (along with a new "Strong Buy" rating from Volpe Brown Whelan) was enough to keep PurchasePro -- which provides online marketplaces for sales between businesses -- flying higher today, with shares up more than 37 percent in late morning action. More than 2 million shares moved before noon.
| Have an opinion on this? |
The move certainly aroused daytraders, with technicians dancing jigs on message boards as morning action annihilated the stock's previous ceiling. Posters on the PPRO message board of Yahoo! Finance went wild with more than 90 posts before midday. PurchasePro also made the top 10 "Hot Subjects" on Silicon Investor's widely-read StockTalk section.
Obviously there's nothing wrong, and even something right, about buying stock in your own company. No doubt Johnson's action is meant to underscore his confidence in the firm.
Unfortunately, the purchase means little. Johnson's bet on PurchasePro.com has long been established with his 26 percent ownership of the company. It's not like Johnson is buying 1 million shares -- he's buying back $1 million of shares, which isn't much for a company that had a market cap of roughly $722 million as of yesterday's close. At today's prices for PurchasePro shares, $1 million means even less.
Instead of focusing on the CEO basically saying "I think we're great" -- real news would be if Johnson didn't think PurchasePro is great -- pay attention to the top and bottom line. PurchasePro's expected growth rate is large, but it's coming off a tiny base; First Call consensus predicts a loss of $1.81 per share on revenue of $5.7 million this year, and a loss of $1.59 per share on $18.4 million in 2000.
Those forecasts for losses may change slightly once First Call includes Volpe Brown's estimates -- which are more optimistic than current consensus -- but today's rise has more than factored that in. As of early afternoon, PurchasePro was trading at a revenue multiples of almost 54 and 24, compared to estimates for 2000 and 2001, respectively.
Not that valuation means much by itself for Internet stocks. Some of PurchasePro's boosters argue that other Web marketplace providers -- specifically Ariba (Nasdaq: ARBA) and Commerce One (Nasdaq: CMRC) -- carry far higher market caps, so PurchasePro must be seen as cheap.
Even that dubious valuation method doesn't look good for the company's share price, because PurchasePro's business is much smaller: revenue figures for the latest quarter reported show $17.1 million for Ariba, $10.4 million for Commerce One, and $1.7 million for PurchasePro.
Volpe Brown Whelan analyst Charles Finnie also notes that PurchasePro is cheaper than comparable stocks (although his summary doesn't state which stocks those are), but even at that lower level, he believes the stock has a great deal of potential. As of yesterday's close, PurchasePro traded at 43.8 times estimated gross profit for 2000, Finnie says; assuming that multiple stays constant, that means the stock in 12 months should be trading at $90, or 43.8 times estimated 2001 profit.
Unfortunately, that thesis assumes the multiple should stay the same. Ultimately, it comes down to the same thing, a comparison with the rest of the sector.
E-commerce marketplaces remain young. The idea sounds good, but so did electronic data interchange not so long ago; neither Ariba nor Commerce One nor PurchasePro could just as easily end up like Sterling Commerce (NYSE: SE, currently trading at slightly more than half its value just five months ago) as not, especially given the speed of technological change nowadays.
Traders don't care, they'll just take their stock profits, even if they're driven by airy press releases. But investors might want to wait for corporate profits first.
Perhaps today's buyers were encouraged by recent block purchases that may indicate institutional buying; just remember that institutions make mistakes too, which is why the majority of mutual funds underperform the S&P 500. 22GO>