Re-valuation for the Internet Sector
by Cherie Payne
cherie@smallcapcenter.com
January 11, 2000
Paine Webber analyst Chris Dixon says yesterday's announcement of the merger between America Online, Inc. (NYSE: AOL) and Time Warner (NYSE: TWX) may spark re-valuations in the Internet sector.
"We are now moving into a reality check as to what Internet valuations are going to look like," Dixon predicted. "And mean old Mr. Market is just trying to decide...whether the new company is going to get based upon Internet valuations - which is one thing - or whether it gets valued on traditional media valuations, which is going to be a critical question for the Internet at large."
Analysts at Morgan Stanley Dean Witter say the valuation question has been key for small caps so far this year.
"Last week the value stocks, down 1.1%, outperformed the growth stocks, down 4.6%," says this week's small cap report.
"More importantly, after more than a year...the value stocks outperformed growth stocks by more than a 3.5% margin," the report continues. "The technology sector explains the difference between growth and value stocks' performance."
The report notes that in the Internet sector, only 16 companies posted positive performances in the first week of 2000.
Yesterday's announcement was met with widespread speculation that the AOL Time Warner deal could lead to a wave of mergers between Internet and media firms. Dixon seemed to downplay yesterday's enthusiasm, but conceded that some smaller Internet firms might see benefits.
When asked what kind of effect the announcement has for other Internet and media companies, Dixon responded, "not much."
"The good news is that Time Warner AOL is effectively accelerating the development of the Internet, from a text based world to a broadband platform that can effectively offer television-like video and music streaming," he explained.
"That's great news for all those Internet companies that are in those businesses, because it just means that the world that we've all [anticipated] is being accelerated. It's going to happen sooner, rather than later."
"So that's great news for companies like CDNow (NASDAQ: CDNW), or some of the [other] smaller [Internet] companies," Dixon said.
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