Market
capitalization used to be a simple concept. A company with a track
record of significant profits typically saw its stock price rise
with earnings, which in turn raised the company's total value.
Meanwhile, companies without significant profits saw their stock
prices stagnate or fall, dragging their total value down.
Then along came Netscape Communications Corp., which had only
limited revenue and had never turned a profit. In 1995, the
16-month-old maker of the Navigator browser went public and saw its
stock immediately skyrocket, making co-founder Marc Andreessen a
multimillionaire and changing the way at least some companies are
valued by Wall Street.
That scenario has since been repeated many times. Companies such
as Priceline.com Inc. have experienced mammoth initial public
offerings as investors have rushed to throw millions at tiny
Internet-related companies that are high on concept and low on
earnings.
"Netscape really set the stage for all this," says Pimm Fox,
director of The Pimm Fox Group, a San Francisco money management
firm. "It was a new way of generating investor enthusiasm in
companies."
From Past to Future
What changed, at least when it comes to Internet companies, is
that investors are looking not at a company's history but primarily
at earnings growth potential. They are banking, analysts say, on the
notion that the Internet will fundamentally change the way business
is done. They're also demonstrating their belief that the companies
that figure out how to capitalize on the Net first will dominate the
market.
"That's why these companies can have multimillion-dollar market
caps when they have a couple of million dollars in sales and tens of
millions in losses," says Rajesh Kothari, a principal at GMA
Capital, an investment banking and health care venture capital firm
in Farmington Hills, Mich. "(Investors) are looking at the potential
because that is where the value is."
The astounding rise in the stock prices of some Internet
companies can make for some strange situations. Santa Clara,
Calif.-based Web portal Yahoo Inc., for example, is worth more on
paper ($59.5 billion as of late November) than Detroit-based General
Motors Corp. ($47.6 billion) even though GM has more than 100 times
the net income ($2.9 billion vs. $25.6 million).
But market caps can fall, too. When they do, investors eager to
maintain value can put pressure on top executives, which might lead
to downsizing the company to improve the bottom line or even a
de-emphasis on critical technology projects.
For corporate information technology, there are other
implications. Analysts say that in some sectors, the stock prices --
and hence market valuations -- of traditional companies that are
slow to take advantage of the Internet are beginning to stumble. One
example is CVS Corp., a pharmacy chain in Woonsocket, R.I.
CVS stock has fallen 30% this year, even though revenue and
same-store sales are up, according to Steven Feinstein, a professor
of finance at Babson College in Wellesley, Mass. Feinstein says the
stock of CVS, which only four months ago established an Internet
presence, has stumbled because of competition from online
competitors such as Drugstore.com Inc. "If you think the Internet is
how people are going to buy drugs, then those companies are going to
be cannibalizing the (brick-and- mortar) companies," Feinstein says.
"CVS is scrambling to be an Internet company."
That kind of news might inspire the folks in corporate IT to
lobby their executives to move as quickly as possible to take
advantage of the Internet, at least if they're interested in the
value of their company and in any stock they might hold.
"A lot of companies out there are in the same boat as CVS, and
their stock value will be hurt to the extent that they don't jump
onto the Internet," says Feinstein. "(Corporate IT) could point to
the CVS stock price and say, 'You should be listening to us a little
more.' "
Don't Count Your Riches
But in the Internet age, when stock prices can rise and fall 10%
or more in a day, companies also have to be careful about focusing
too much attention on market capitalization.
John Nesheim, author of High-Tech Startups (Strategic Enterprise
Consulting, 1997), says firms that do that run the risk of
distracting their employees from the bigger goal of developing good
products. Nesheim says he spoke recently with the CEO of a West
Coast Internet company who's struggling to keep his employees
focused as the stock price rises.
"The company went public at 12, and the stock started going up to
18, then 22, then 32," he says. "Every time it goes up a buck,
people are shouting and sending e-mails around.
"The objective," Nesheim adds, "is to deliver consistently more
value to the shareholders and not to get involved in these
situations where the company is moved by stock price instead of
customers and end users."
Sites 
