June 25, 2000 Adam Smith.net places the time at five minutes to midnight We are moving the hands of the Internet bubble clock one minute closer. It was one of our original points that a faltering industry leader was a danger sign. We recalled that thirty years ago, you could tell when the airlines were heading into trouble because when they went to the debt markets, they had to pay higher and higher rates. Each convertible bond of Pan American and Eastern was sold at successively deteriorating terms. We have a major sign of this in the Internet stocks. Amazon.com has two convertible issues: $1.25 billion in 10 year notes, sold in February '99, and $662 million denominated in Euros and sold this February. Late last week, a Lehman analyst, Ravi Shuria, did a thorough analysis. This knocked the stock down 15 points in two days, and it now sells at less than a third of where it sold -- at 113 -- last December. Shuria says Amazon has a great brand, but hasn't shown the ability to turn a unit sold to a cash flow profit. From '97 through the first quarter of this year, Suria says, Amazon hit the capital markets for $2.8 billion, and revenues were $2.9 billion. In other words, it borrowed as much as it sold. Shuria says Amazon has a weak balance sheet, poor working capital mamagement, and massive negative operating cash flow -- and is at risk. Amazon has to generate cashflow or continue to raise fresh capital. In four quarters, he says, it runs out of cash. Amazon does have a great brand name, no question. So did Pan American -- it was the greatest name among American airlines. But the flaws in Pan American's operating systems and its debt put it at risk. It took only a small turn of the economic wheel to put it out of business. The Internet will go on, a mighty phenomenon. But the stocks of Internet companies will sell at multiples of earnings and cashflow -- and mutli-billion dollar valuations will be harder to achieve. The air will be out of the bubble. The name Adam Smith and the logo of Adam Smith are marks Registered in the United States Patent and Trademark Office. Copyright ©2000 Adam Smith Educational Productions Ltd.

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