FORTUNE magazine re: falling internet stocks. There've been so many stories like this published in the past two days--wonder if Internet stocks will get hammered again on Monday?
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August 6, 1999
Internet Bubble Is Over
The Internet stock bubble is over. It didn't go out with a bang, as some had expected. Instead it's been a prolonged hisssssssss.
We've had small punctures in the past, when Internet stocks went down 20% or more. But there were always investors eager to jump in and rocket the stocks up again within days or weeks of the downturn.
But this time is different. The current decline has been going on since May. It's been steady, and it's been deep.
Take the 10 Internet companies that had the largest market capitalization at the end of May: AOL; Yahoo; eBay; Amazon; Priceline; @Home; E*Trade; CMGI; DoubleClick; and Excite, which was acquired by @Home. Every one of the nine companies is off nearly 50% from its 52-week high. And two, eBay and E*Trade, were this week trading at only one-third the price of their high for the year.
Don't expect a big bounce back soon. We are not likely to see those 52-week highs again for a couple of years. Internet companies are going to have to grow into those valuations. They won't be handed them again.
Why? Until a year ago the supply of Internet stock was limited, and there were lots of investors eager to buy. So naturally the price rose. Today there is plenty of Internet stock available for investors to buy, and more is becoming available all the time. In 1997 there were 14 Internet IPOs. In 1998 there were 26. So far in 1999 there have been 114 Internet IPOs, and there are more in the pipeline.
In addition, there are large blocks of never-before-traded stock in established Internet companies that are coming on to the market from employees that have vested their options, and investors in venture funds that have received distributions of the stock. Add in stock and convertible debt that companies like Priceline are now selling.
In other words, there's a glut of Internet stock. And it's only going to get worse.
That wouldn't be all bad if the supply of investors continued to grow at the same pace. But it hasn't. A couple of things have happened to dampen the wild enthusiasm for anything.com.
Investors are now taking a little harder look at the business models of Internet companies, and they don't always like what they see. While the market is often forgiving of Internet companies that put revenue growth ahead of profitability, investors do want to know that profits can be made some day. And that's becoming less clear, not more.
If the economy slows down, as it appears to be doing, investors are also concerned that Internet companies that spend aggressively in anticipation of fast growth could be in for a rude shock.
Take Amazon. The company is spending aggressively, adding new product categories like toys, increasing its advertising and marketing, and building more bricks-and-mortar distribution centers. Revenues nearly tripled in the last quarter, but losses grew even faster, up six times over last year. That gets investors nervous.
Investors are also beginning to think that bricks-and-mortar companies are finally getting their Internet act together. E*Trade is more worried about Merrill Lynch getting on the Internet than it is about any of the online trading firms.
Internet startups used to have the dot com story all to themselves. That's no longer true. If the last few years were all about Internet startups besting bricks-and-mortar companies. The next few years could be about clicks-and-mortar, how companies that intelligently combine the best of both worlds are winning on the Internet.
And for many pure Internet companies that could be a challenge. They may wish they had used their inflated stock to purchase some bricks-and-mortar assets when they had the chance to do so.
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