[Analyst's Pricing Concerns Dent Internet-Stock 'Bubble']
NEW YORK -(Dow Jones)- Shares of prominent Internet-based auctioneers, merchants and entertainment firms fell Wednesday after a prominent Internet analyst raised longstanding concerns among some market watchers that the Internet will drastically shrink profit margins.
CIBC Oppenheimer analyst Henry Blodget gained wide notoriety last month when he hiked his share-price target for industry pioneer Amazon.com Inc. to a then-outrageous $400. The stock subsequently eclipsed that mark, when adjusted for a 3-for-1 split earlier this month. But Blodget Wednesday said he won't raise his price target.
Blodget cited the recent trend among Internet retailers to sell merchandise at wholesale prices. Onsale Inc. and Buy.com recently announced plans to sell their products "at cost," relying instead on revenue from advertising. Blodget noted that Amazon has cited deteriorating profit margins though its revenue continues to explode. Blodget said he is monitoring "the success and/or failure of the 'at cost' strategy."
The stocks of many Internet concerns have soared into the stratosphere in recent months on the premise that strong revenue growth will eventually produce strong profits. The shares have been propelled by an Internet-stock frenzy that may be the biggest speculative bubble since the biotechnology craze of the early 1990s. History shows such speculation often ends badly and the Internet boom may be especially vulnerable because of a crucial but widely overlooked fact: The Internet, a coldly efficient medium, is hostile to profit margins.
OnSale this week started selling new personal computers and accessories to the public - at the same wholesale price it pays for them. OnSale said it is gambling that revenue from advertising on its World Wide Web site, fees for service contracts and leases, plus a nominal handling fee per order, will leave it with a small profit margin. The company says it doesn't expect to make a profit from marking up prices to consumers. Buy.com also is sidestepping traditional retailers and other resellers to reach the consumer directly, at prices that are sometimes below cost.
Shares of Onsale (ONSL) fell $4.125, or 8.2%, to settle at $46.125 Wednesday. Shares of another online auctioneer, eBay Inc. (EBAY), fell $16.125, or 7%, to $214.875. Shares of Ubid Inc. (UBID), a smaller online-auction concern, fell $8.1875, or 10%, to $73.8125.
Among online retailers, shares of Amazon.com (AMZN) fell $26.8125, or 19%, to $113 and CDNow Inc. (CDNW) fell $2.5625 to $19.25. N2K Inc. (NTKI), Cybershop International Inc. (CYSP) and Cyberian Outpost Inc. (COOL) also posted sizable losses.
Shares of Yahoo (YHOO), which collects rent from other companies that want to set up shop on Yahoo sites, were off $37.8125, or 12%, at $285.1875. And Excite Inc. (XCIT), a Yahoo rival that has agreed to be acquired by Internet-access firm At Home Corp., fell 12% to $96.625.
Among recent Internet IPOs, shares of theglobe.com Inc. (TGLO), EarthWeb Inc. (EWBX), TicketMaster Online-CitySearch Inc. (TMCS) and Xoom.com Inc. (XMCM) all fell.
Despite the downturn, some market watchers don't think the Internet bubble is about to burst. "I just think it's slowing down," said Tom Taulli, an analyst with the Silicon Investor, a popular financial site on the World Wide Web. After months of soaring stock prices, trading action is beginning to slow and stock prices are starting to show some give, Taulli said. "If the bubble were bursting, there would be panic," he said. "This isn't panic."
Still, many other industry watchers agree it is only a matter of time before the largely unproven sector plunges. But nobody seems to be able to predict exactly when. As retail investors excited over the prospects for online shopping continue to snap up shares of Web companies - often with little regard to fundamentals such as earnings - it is anybody's guess when the mania will end. For those who do focus on the fundamentals, the first quarter could bring disappointment as the Web companies face seasonality in the first part of the year after a busy holiday season. Investors are expected to focus on the results from America Online Inc. and Yahoo, two of the few profitable Internet firms.
Much of the buying hasn't been by big institutional investors. Instead, the stocks are being bid up by hyperactive individual investors trading online themselves. This breed of amateur - and semiprofessional - investor, also known as "day traders," quickly move in and out of stocks, rarely holding positions for more than a few days. It's probably no coincidence that the stocks most swept up by this kind of online trading - based on momentum, tiny nuggets of news, or rumors on Internet message boards - are Internet stocks themselves. |
