Taking Stock / Revisiting the Bubble Boy

How should we celebrate the fifth anniversary of the bubble's demise?

Oooh, let's reminisce about the ostentatious waste, the parties, the offerings, the salaries, the stock options, the sushi. No, actually that had become passe by 2001. So maybe we should explain that it's different this time around? But hang on, we did that to death last year.

So maybe we should warn that the earnings multiples of the telecommunications and Internet companies are riding high again, that venture capital funds are shoveling out money thoughtlessly just for the sake of investment itself and that human nature will inevitably allow another bubble to develop. Hmm, not a good idea, we'll have ample opportunity to do that throughout the year.

Got it. Let's spend a few minutes with the king of the bubble himself, the man who came to symbolize it, a man who burned up hundreds of millions of dollars, who changed business model how many, four, five times, but who managed to survive, armed by the tremendous sums he raised at the height of the bubble era.

To mark the fifth anniversary of the death of the telecom, Internet and high-tech bubble, let's see what Emblaze chief executive Eli Reifman, who remains much sought-after for interviews, has to say.

Just yesterday he talked with one newspaper supplement and announced that the bubble is back, big-time.

He should know: In the last year Emblaze stock soared 75 percent, and this is a company that in 12 years of existence has yet to achieve a penny in operating profits, yet it managed to float two subsidiaries in London.

In honor of the occasion, we decided to revisit a short, amusing interview we held with Reifman four years ago to the day, a year after the bubble exploded with a bang. The time was March 2001 and Reifman was feeling hurt by a commentary in which we evinced surprise that the distinguished investment bank Lehman Brothers had evaluated Emblaze at $6 billion, which is 10 times its present market capitalization.

Mr. Reifman, Emblaze's revenue totaled all of $30 million last year and may reach $60 million this year. How does that translate into a $6 billion company value?

What is the new economy based on, if not exactly that. On technology, on young companies like ours that are capable of tremendous breakthroughs, justifying their market cap. I think we can reach that value based on highly conservative parameters.

What are these parameters?

This year we had $30 million revenue and next year we'll have $60 million. Four years from today we'll be making $400 million, $500 million a year.

(Emblaze posted $45 million revenues for 2004.)

OK. Say you do achieve phenomenal growth like that, how do you reach a $6 billion valuation?

If the company has $500 million revenues and you give it a multiple of eight times revenues, then you get that value. You agree with me that a multiple of eight times revenues is reasonable?

No. It seems extremely high to me.

OK, listen, you're in the minority. Ask any venture capital manager and he'll tell you that a multiple of eight times revenues is very attractive, and remember there's an upside, too.

Before we get to that upside, let's go back a moment. How do you reach $500 million revenues?

$500 million is not a lot. With revenues of $500 million, we're not even impacting the cellular Infrastructures market, it's less than 10 percent.

What market do you mean?

The market of cellular infrastructure for video.

But that market is very small at present. How can we know how big it will be, and how big your market share will be? How do you reach $500 million?

The company Ovum Research, which is the guru in that sphere, estimates that by 2010, video capacity will have penetrated 50 percent of cellphones.

The year 2010 is rather distant. Meanwhile we see that the leading company in voice and video over Internet, RealNetworks, is trading at a market cap of a billion dollars, even though its revenues are 10 times more than Emblaze's.

We have a product that makes the difference, a product addressing a huge market, a market of masses. A product that will become a commodity in the cellular infrastructures market. The market for cellular video is several times bigger than the market for Internet.

How will you penetrate that market and earn money?

I sell the system to cellular operators and get royalties from each phone sold with video capacity. My model is like that of Comverse Technologies, which has installations with 350 customers and revenues of a billion dollars.

How many customers do you have?

Our assumption is that within five years, we'll have 300 customers. If Comverse achieves revenue of a billion dollars from 350 customers, we should make a least a third of that amount on the same number of customers.

How do you get 350 customers?

That's the business plan.

How many customers do you have today?

Twenty. But these are customers that just bought our Backend system. We haven't begun to sell the chips for end units.

So you think a market cap of $6 billion is reasonable.

Certainly. And Lehman Brothers is not the only one recommending the stock. Three other big banks do as well.