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At $78 a share, American (DUST:Nasdaq) trades at 106 times next year's revenue. But the other companies in its space are trading at something like 200 times revenue. So it stands to reason that the Dust should be nearly double what it is now.


Adam Lashinsky on the State of the Internet

Dan Colarusso on Internet Growth Projections

Katherine Hobson on E-tailers' Push for Profitability

Catherine Valenti on Ailing Internet Funds

Jamie Heller on Using the Net to Track Net Stocks


Tracy Byrnes on the Frenzy Next Time

George Mannes on Self-Hating Dot-Coms

K.C. Swanson on Old Economy Winners

David Gaffen on Measuring the Internet Economy


Ian McDonald on 'Butterfly' Companies

Justin Lahart on Real Net Valuations

Joe Bousquin on Building the Perfect Net Company

A Dan Gross Opinion Piece: Were the Old Guys Right?

TSC Roundtable on Predicting Six-Month Winners

Roland Jones on The Last Days of Daytrading

Eric Gillin on Working for a Dot-Com

Seems a bit ludicrous now, but it wasn't so long ago that playing relative valuation games with Internet companies was pretty much standard practice on Wall Street.


Deutsche Banc Alex. Brown

analyst Lawrence Marcus initiated coverage on



last December with a $120 price target, for example, he said that it was priced at $320 per unique user, while companies in the same space like

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, were trading at about $590 per unique user. NBCi never hit that $120 mark, and closed on Thursday at $7.88. (To be fair, it should be said that among the risks to his forecast, Marcus included "hearty valuation that defies 'traditional' measures.")

Nor was this at all an isolated case. Because there was little in the way of earnings in dot-com land, because the stocks kept going higher, analysts couldn't rely on those tired old methods they'd learned in business school. Pretty soon, everything was relative.

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"There was never a way to value them except in relation to each other," says Jeff Matthews, of the Connecticut-based hedge fund

Ram Partners

. "When they were all moving around the track together at 100 mph, it was all about relative valuation."

Now most of these same companies are on the warning track, and some have hit the wall. Internet Sector

Index has been more than halved from its March high.

Fortune Magazine

, which came out with its "Doing Business the Dot-Com Way" that same month, has just run with "Lessons From the Dot-Com Crash." And those "traditional" measures of valuation? They seem to be getting a lot more credence.

"The new new thing is really the old thing," says

Merrill Lynch

director of global growth strategy Michael Moe. "Ultimately, you have to show a business model that makes economic sense."

In short, that means earnings -- maybe not today, maybe not tomorrow, but not in some never-never land of the future. It isn't for nothing that the phrase "path to profitability," virtually unspoken a year ago, is on so many Internet company CEOs' lips.

"I don't know of anything that can, over some reasonable time frame, exist just on revenue growth," says

J.P. Morgan

equity strategist Doug Cliggot. "At some point in the visible future, a company needs to be generating some reasonable return on shareholders' capital."

Price-to-Earnings Ratio to Growth

A typical way of figuring out valuations for growth stocks, before the dot-com mania set in, was comparing a company's

price-to-earnings ratio with its rate of growth. A good benchmark for the price-to-earnings to growth, or PEG, is

General Electric

(GE) - Get General Electric Company Report

. Analysts expect its earnings to grow at around 17% next year, its forward P/E is 38, so it gets a PEG of around 2.2.

Now let's work out the same ratio for


(EBAY) - Get eBay Inc. Report

, the online auctioneer. Its earnings are expected to grow 100% next year and its forward P/E is 318. That gives it a PEG of 3.2. If you take the view that what you're buying, when you buy a stock, is future earnings growth, and that growth is growth, then investors are paying a pretty huge premium. Moreover, remember that GE, an original

Dow Industrial Average

component, is a mature company, while eBay is a maturing company. Its earnings might grow at 100%, but what about the year after that? And the year after that?

But maybe using PEG for eBay is a little unfair. It is a quickly growing company, after all, and as a result a lot of the money it might otherwise state as earnings is getting reinvested in growing the business. In the case of quickly growing companies with little or no earnings, says

Sanford C. Bernstein's

Faye Landes, a star retail analyst who now also covers e-commerce, it's better to use a discounted cash flow analysis, which values a company on the free cash it will generate over some set period of time, usually the next 10 years.

Even then, and even though she genuinely likes the company, eBay doesn't stack up, says Landes. "We would love to be able to recommend the stock," she says. "At the right valuation, we will. We're not there yet." Landes' firm does no underwriting.

Yet other analysts, also using the discounted cash flow method, are recommending eBay. Stephen Fitzgibbons of

Chase H&Q

, which has done underwriting for eBay, has put a $65 price target on the stock based on his model, while


Sara Farley has a $95 target (PaineWebber has done no underwriting for eBay).

Divergence in Valuation

Why the divergence? Different analysts make different assumptions about how quickly a company can grow, what the company's rate of growth will be once it matures and what kind of risk level is inherent in the shares. Landes is more conservative than some of her counterparts, in part because when a company gets valued in this way, slight differences in growth can make a big difference. "This analysis is very sensitive to changes in growth," she says. "The example of


(whose shares took a whack in September when it warned of subpar revenue growth) is a perfect and poignant example of that."

It's all kind of sobering, the way the dot-coms have fallen so much and still their valuations don't seem to stack up well against their counterparts. Buy an offline retailer like


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, and no matter how you slice it, it seems like your paying a whole lot less for your growth than you are for

(AMZN) - Get, Inc. Report

. If



is essentially a media company, why does its growth cost so much more than


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But whether these dot-coms will dip down to traditional valuations anytime soon is very much an open question. There are some dynamics to business on the net that don't exist offline. The Internet has always been about disparate gains going to category leaders, and in the wake of the dot-com shakeout, that may become more true than ever.

"The access to capital today is extremely challenging and narrow," says Moe. "That's going to be a barrier to entry. Some kid out of Stanford in a garage is not going to get funding." And while the kid goes begging on Sand Hill Road for money, or sees his company's IPO pulled, the leaders keep getting bigger, creating even more of a barrier to entry. The brush gets burned, the trees survive and grow, and soon the canopy blocks light from reaching the forest floor. No more brush.

The shakeout has also left investors, some of whom are mandated to buy Internet shares, with fewer dominant dot-coms to choose from, says Matthews. "There are aggressive growth funds, and there are still Internet funds around. They're going to want to own the ones left standing."

And valuations?

"The reality," says Matthews, "is that Wall Street makes it up as it goes along."