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2HRS2GO: The postman rings thrice

9 min read

Let's sort through e-mail.

Letters have been edited for grammar and space. Responses -- I answer all messages that show thought on the part of the sender, and some that do not -- have been edited for grammar, space, syntax and occasionally to remove unwarranted snippiness that crept into my personality. All dialogues were chosen to illustrate broader points.

Fred from Fremont believes a column on a partnership of Amazon.com (Nasdaq: AMZN) and Toysrus.com missed an important point:

Great story, but it leaves out one huge unanswered question: when it comes to toys and video games, etc., who the hell else is there to complete with Amazon/Toys 'R Us this Christmas besides eToys (Nasdaq: ETYS)?

Based on today's agreement, ETYS will be toast by mid next year (or will partner with someone like Walmart.com as WMT's online Toy deparment).

You know, it's almost become passe to bash AMZN. If you really wanted to make a name for yourself, you would do a story that looks three months down the road and says "Boy, with many of its online competitors dropping off, Amazon is poised for a huge holiday season."

Because that is exactly what's going to happen. Otherwise, your story shows the short-sightedness of a day trader.

Amazon.com always has a huge holiday season. The surprise would be if it didn't have one.

You point out that as far as big name online competitors go, only ETYS exists. But the power of small sales is being underrated on the Internet, with auctions and such.

I certainly wouldn't say that Amazon.com faces no competition; you can't say that about any e-tailer, not as long as bricks and mortar stores exist.

Andrew Grivas questions my approval of the Nortel-Alteon deal:

You seem to imply that people who bought ATON's stock at or near the current price were "creating problems" for themselves.

Was it foolish to buy stock in a company that is growing this fast? Is this price really out of whack with the valuations of other stocks in this sector?

I don't think it is obvious that ATON is overpriced right now and those that bought recently may be understandably disenchanted with the buyout price. It comes at a particularly bad time with respect to the overall stock market.

I bought ATON stock at 130 5/8 and I'm disappointed at this development from an investment standpoint. I hope there will be other bidders who will see greater long term value to ATON.

You ask if it was foolish to buy into a company growing at such a rapid pace as Alteon. Based solely on growth, no, of course not.

But investors ought to be wary of any stock whose price increases as speedily as Alteon's did in the two or three weeks prior to the acquisition announcement. More often that not, such accelerated movements simply aren't justified; just ask anyone who "invested" -- and I say that with more sarcasm than I can possibly convey in text -- in Internet stocks last year. Stock price appreciation isn't just about corporate growth, but also about market movements and sentiment.

Stock buyers are responsible for their own results, barring an unforeseen catastrophe such as a natural disaster or embezzlement by a top executive. Obviously, stockholders didn't negotiate this Nortel deal, but shareholders who saw Alteon's meteoric rise against the backdrop of a still-somewhat-sluggish market could and should have wondered how much more upside there could possibly be for this stock over the next several quarters.

Thanks for your reply.

Perhaps you could write a piece on Nuance Communications (Nasdaq: NUAN). This is a stock that has not traded down in 5 consecutive months. Would you dare tell these investors that NUAN is overbought too? (Yes.)

I agree that stocks can get overbought, but relative to competitors a stock may continue its ascent if its perceived value is less than its market cap. Most of the so-called "genomics stocks" are enormously "overbought" in relation to their value a year ago, but some may consider them oversold relative to just a couple weeks ago.

My point is you just can't evaluate a company based on technical analysis and say it's overbought.

I'm not a TA expert, but it's fair to say that when you're looking at a stock -- any stock -- with a meteoric rise, you have to be prepared for it to stop. Which is what happened to Nuance recently.

Investing in newer companies is always dangerous -- that's why IPO filings contain pages of "Risk Factors". When the stock price spikes suddenly, you should be especially wary.

Of course, fistfuls of money can be made playing these momentum stocks, but the downside is equally great. You have to be able to tolerate that if you're going to play the field.

Reader Scott Messina vehemently disagreed on a July piece regarding Nextel (Nasdaq: NXTL):

I read your article on NXTL today and I am amazed at how ill-informed you are. Do you even know why NXTL missed their earnings estimates? Do you know how much it costs for them to subsidize each new subscriber? I'll give you a hint: it's $415 per new subscriber.

It doesn't take a genius to figure out that if NXTL beats subscriber estimates handily, as they did this quarter (for the umpteenth quarter in a row--just in case you are looking for a catalyst), by say 50,000, that 50,000 * $415 is $20,750,000 in extra costs. Are these costs bad? Certainly not.

Now add to that additional costs to build out the system (NXTL adjusts according to subscriber growth and looks 6 months down the road) and you can clearly see why it is difficult for a start-up like NXTL, albeit a monster company in hypergrowth mode, to make progress toward achieving actual EPS. The more subscribers NXTL adds the longer it will take to reach profitability.

Further, to judge this company on "earnings" is idiotic. They have the highest average revenue per user in the business at $74 per subsriber and ARPU (average revenue per user) went up this quarter. Cash flow is increasing. International, which actually covers more POPS than domestic, is really starting to pick up. And 59 cents on every dollar of revenue falls to the bottom line.

I know this. Anyone who owns the stock and does even the slightest bit of due diligence knows this. It's a shame that journalists like yourself don't know this.

NXTL has missed estimates 5 times in the last couple of years and the stock has soared. I am up roughly 1000 percent from my initial purchase. If you want to believe it is because of take over talk, go ahead. I just wish you didn't have a forum because you clearly do not know what you are talking about.

I've heard all these arguments about Nextel before. And you know something? I heard virtually the same arguments about almost every publicly-traded Internet company at one time or another. "Revenue per customer is going up, yadda yadda..."

But look at the context.

If Nextel is truly being judged on its "highest" ARPU in the business, then its stock should be tracking "higher" than other wireless carriers. It is not. See this chart for details:

NXTL was moving in concert with every other major wireless carrier in the U.S. Either they're all equally good or they're benefiting from some sort of secular trend. You don't seem to believe that they're all equally good, so let's focus on the latter.

What's the overriding trend in telecommunications these days? I believe it's M&A, as evidenced by the fact that nearly every major telecom carrier is involved with it. Wall Street talks about it constantly. Or do you truly believe all fund managers with telecom investments sit around discussing the metrics of Voicestream vs. Nextel?

I find your characterization of Nextel as a "start-up" interesting, since the company has been extant for 13 years, and publicly traded for more than seven.

But heaven forbid we actually try analyzing a veteran company on a P&L basis. Why, Wall Street would never go for that, right? Or maybe someday it will -- just ask any dot-com.

Thank you for responding to my email. I must say that although I find fault with your article and your logic I respect you for responding to a critic.

While I agree that NXTL is participating in a secular trend, I disagree with your logic that stock prices reflect the true progress of a business.

NXTL is undervalued relative to its peers on a cash flow basis, pure and simple. Only NXTL and Sprint PCS (NYSE: PCS) are cash flow positive, with NXTL being the furthest along in the industry.

Further, relative to Voicestream (Nasdaq: VSTR) for example, a company that has a national network (if you don't mind leaving out California -- only the most populated state in the country), NXTL has higher revenue per user, its system is more built out, its churn rate is more stable and lower, and minutes of use are higher.

AWE is still mostly analog as is Verizon. Sprint is doing a great job. They are lowering churn but their ARPU is significantly lower than NXTL's. Based on the difference in ARPU, $74 Vs $54, one NXTL add = 1.37 PCS adds, that is to say, PCS has to add 775,630 adds to NXTL's 566,000 to get the same revenue.

How can you not compare these metrics? And how can you not believe that fund managers are not comparing these metrics? I compare these metrics as part of my due diligence process and so should any other investor.

Yes, NXTL has been public for many years but the "new" NXTL is clearly tied to Craig McCaw's investment in the company some four or five years ago.

When NXTL reaches 14,000 cell sites they will have capacity for 25 million users. At $74 ARPU, that translates into $22 billion in revenues annually.

There is still huge upside to this company without any takeover premium. This stock is going higher because the fundamentals are the best in the industry, not because Bernie Ebbers (the boob) gets a panic attack about not having wireless. M&A is only part of the wireless story.

And I repeat, the fact that you misrepresented NXTL's "miss" on earnings is insincere to say the least. If you are as knowledgeable about the industry as you claim to be, you would have simply stated that the greater than expected adds and the costs associated with subsidizing them was the cause of the miss. That is good news, not bad news.

Acquisition costs per user are supposed to fall as you add subscribers -- that's what scale is all about. Missing estimates is not good news, not in any industry. If nothing else, it shows an inability on the part of management to provide proper guidance to Wall Street.

Some of your assumptions about Nextel are just that -- assumptions. Maybe Nextel someday will have the capacity for 25 million users, but that's no guarantee that it will get 25 million users.

You can compare as many wireless providers as you want, but it doesn't change the reasons why stocks move in certain directions. The particular column that started this thread wasn't judging the value of individual wireless companies relative to each other; it looked at why a particular stock, Nextel, was moving. As you point out, stock movement and company quality don't always coincide.

Since this dialogue occurred, VoiceStream (Nasdaq: VSTR) announced its acquisition by Deutsche Telekom (NYSE: DT). Wireless stocks have since drifted in the same range or lost ground.

No mail column would be complete without one of these, which are almost always unsigned. This missive came from "LBinvestco":

Why you fools should be allowed to post your amatuer and unresearched opinions along side of respected and creditited news organizations is beyond me. Happily your uneducated babblings seem to have to have no effect on the price of the stock.

Still, it's frustrating to see your misrepresentations, inaccurate statements, and darnright (Hey, I like that one) wrong descriptions of facts, alongside analysts and periodicals who actually have a clue. ZDNet shoots itself in the foot by having amateurs or fools or both giving opinions they know nothing about.

I don't have the time or the inclination to go point by point to show you where you are wrong, wrong, wrong. Try reading The Wall Street Journal -- a real paper -- or Smart Money or Money magazine: real business journalists, who do some research before they give shallow and uneducated quips about which they have no clue.

You might be able to tell the world if computer games are any good or not, other than that you are way out of your league. Way, way out.

Thank you for your well-reasoned and thoughtful response.

Sergio Non,