Recent Hop in Playboy Stock Should Give Investors Pause

The IPO market would undoubtedly embrace Playboy.com, and that would be wrong, wouldn't it?
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Has the capital allocation system gone completely awry? Have the stock markets of America simply stopped working as a method of valuing and rewarding profitable enterprises?

Or has the Net changed the world and we are blind to these changes because of traditional benchmarks of valuation and profitability?

For most of the last 10 years, 10 years where our stock market and our enterprises, particularly technological enterprises, prospered, we had the initial public offering market to thank. The mutual funds, great repositories of American wealth, annointed companies that they collectively regarded as winners. The funds bid up companies that produced faster chips, better drives, forward-looking chip equipment makers, and anything that could be considered leading or innovative when it came to personal computers.

But now a new force has taken over the capital allocation process, the day traders on the Net. IPOs are now dominated by

Knight Securities

, a wholesaler that is made up of the clients of the e-brokers. The sheer market power of Knight is unheard of.

And Knight's clients know only one thing: If it has Net in it, we have a winner. If it doesn't, we have a loser. That means we are going to be inundated with Net companies that otherwise would not be survivors, and we are dooming a whole host of other enterprises with potentially terrific value because they don't have an

e

in their names.

I thought of the absurdity of this all during the

WavePhore

(WAVO)

contretemps. There was a method to my original argument, which was to get a debate going about whether this method of capital allocation makes any sense at all. Of course, some journalists tried to get the debate to be about me -- about whether money managers should be allowed to speak their minds, even after disclosing their investment positions. But the real debate will not be denied: Are we placing too much emphasis on the Net and allowing it to blind us to marginal enterprises that otherwise would not get funding in a more rational world?

I tried to get the debate started again, with unforeseen consequences in my return trip to "Squawk", when I tried to press Christie Hefner into the illogical admission that her company was worth more dead and then reborn as

Playboy.com

. The idea behind that thrust of questioning was that

Playboy

(PLA)

the media empire, has to be worth more than Playboy the Web site, with its 30 some thousand subscribers. But Heffner didn't know where I was coming from and instead took it as an opportunity to say she was exploring such a notion, which juiced the stock up 15% in a couple of days.

Wrong!

Let's take this Playboy.com to an extreme for the purposes -- yes hypothetical -- of getting a real debate going. There can be no question that the IPO market would embrace Playboy.com and reward it with a valuation well in excess of the current Playboy empire. Playboy.com would then use its inflated currency to go buy the assets of Playboy for virtually pocket change. But why would it want to? The market is only rewarding the Web! There can be nothing worse than the bricks-and-mortar version of the publishing industry, the magazine itself, with its excessive printing and mailing costs.

In the world of the Web, these assets have

negative

value. Playboy.com's foray into the print business would hurt its multiple on pageviews, or whatever the current multiple is reflecting (at one time it was hits, then clickthroughs, then page views, now pages per day).

But is that right? Does the Playboy media empire have negative value? Is something that can produce a return now, albeit with lower margins, worth much less than something that may never produce a return five or 10 years from now?

That's the kind of discussion I meant to start up with my initial clumsy analysis of the companies that capitalize on the Net with uncertain profit potential.

That's what is at the heart of the way the stock market is working -- or not working -- right now.

Send your responses to

letters@thestreet.com (subject: Internet IPOs) so we can get the real debate going -- and get beyond the phony debate about whether money managers should be allowed to speak their minds, because if they can't, they will just speak through reporters and columnists, which by any stretch of logic is just as nefarious, but without the luxury of disclosure.

Our readership understands this debate better than the dead-tree guys. Let's hear from you, the people who are at the cutting edge.

James J. Cramer is manager of a hedge fund and co-chairman of TheStreet.com. At the time of publication, his fund had no position in the stocks mentioned, although positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column by sending a letter to TheStreet.com at

letters@thestreet.com

.

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