from this week's barrons
Detroit's Past Could Hold Lessons For the
Internet's Future
By Eric J. Savitz
That the Internet sector has become one big hot-air balloon, badly in need
of a sharp pin, has become so obvious to so many on Wall Street that people
have almost stopped talking about it. The Internet stocks look like an accident
waiting to happen? Well, of course. Yawn. Ancient history.
Ancient history, as it happens, provides some sobering insights on what might
happen to the group's current darlings over the next few years. Edward
Kirschner, chief investment strategist at PaineWebber, tackled the subject last
week in an insightful commentary headlined "Net for Naught?" His
observations bear repeating.
Granted, Kirschner says, the Internet "is unquestionably a tremendous source
of growth." However, he warns that the early leaders in high-growth industries
often fall by the wayside much sooner than anyone thinks. Consider, for
instance, the auto industry. "For sheer size, pace of growth and
money-making potential," Kirschner writes, "no growth industry in American
history has rivaled auto manufacturing." Between 1900 and 1908, Kirschner
notes, 485 U.S. companies entered the automobile business. By the end of
that period, 262 had shut down -- and almost all of the others eventually
disappeared, as well. Bad business? No. But long-term success eluded most
of the early entrants.
For a more contemporary example, consider the 1982-83 personal computer
boom, which was followed by the infamous 1984 computer bust. By
February 1984, Kirschner reports, a group of 24 major PC companies had
plunged on average 50% from their 52-week highs. Very few of the
companies survived; fewer still have prospered. In 1982, Kirschner recalls,
the leading personal computer makers included Apple, IBM, Atari,
Commodore, Tandy and Texas Instruments. Of that group, only Apple and
IBM still play a role in the PC industry.
IBM hit an earnings peak in 1984 which it couldn't top for 12 years. "Only
Apple was a good long-term vehicle for playing the personal computer
business, depending on one's entry price," Kirschner writes. And for the
patient investor, there were better alternatives: the 1983 IPO of Compaq
Computer -- or five years later, the 1988 debut of Dell Computer.
Alternatively, recall the 1991 biotechnology boom. That year, PaineWebber's
biotech index rose a cool 157%. What happened next, of course, was
seriously ugly. In the first half of 1992, biotech stocks skidded, on average,
30%. In fact, of the 35 largest-cap biotech stocks in 1991, Kirschner reports,
only 10 now have prices higher than their year-end 1991 close.
Of the other 25, six were acquired, mostly at prices well below their 1991
year-end close, 13 never again reached their 1991 year-end level, and six at
some point topped that level, but subsequently fell back.
Kirschner fears that the Internet boom shares many of the characteristics of
previous high-growth manias. As in previous booms, demand for shares has
spurred a rise in supply "of distinctly varying quality." For the moment, both
economic forces and internal market dynamics remain favorable-low interest
rates, a growing economy, healthy demand for advertising, ever-cheaper
personal computers.
Media coverage of the Internet phenomenon has been glowing. Investors
have been less-than-discerning buyers. And not least, Kirschner observes, "in
an environment of slowing earnings growth, stocks with no earnings appear
attractive." The beauty of having no earnings: no earnings disappointments.
So, how will it play out?
Survival rates for the current Internet players, Kirschner asserts, will be low.
The business environment, he says, eventually will become less favorable. At
some point, the flood of funding to the industry will dry up. For many, Web
page "hits" will fail to turn into consistent profits. Many industry leaders will fail
to thrive for long; some Wall Street favorites will blow up. Too much will be
paid even for the industry's best companies. And many of the long-term
survivors will be companies that don't yet exist. |
