BN 4/14 Internet Stock Mania Can't Last, Investors Say: Taking Stock
Internet Stock Mania Can't Last, Investors Say: Taking Stock
New York, April 14 (Bloomberg) -- Many Internet companies
make little or no money, yet their stocks are soaring. Yahoo!
Inc., for example, showed no profit in 1997 while its shares
gained 511 percent.
To many investors and analysts, this can only mean Internet
stocks are primed for a tumble.
''You have just wanton speculation in them,'' said Nicholas
Moore, a portfolio manager at Orbitex Management Inc., which
oversees $300 million. ''Gravity tends to win these things in the
end.''
Many investors, eager for a piece of the future, are buying
almost anything connected to the Internet. On Monday, K-tel
International Inc., known for its TV pitches for disco records in
the 1970s, shot up 125 percent. It simply announced it will sell
music on a Web site: www.ktel.com.
And there's more. Amazon.com Inc., an online bookseller,
gained 455 percent since it went public in May 1997. In the past
year, Lycos Inc., which runs online World Wide Web guides,
returned 369 percent to shareholders, and Excite Inc., which also
has Web guides, returned 578 percent.
Moore said he doesn't own any of these stocks because
they're overpriced. He sold the last of his Amazon shares when
they reached 50 late last year in his previous job as a money
manager for the Franklin funds. Today the shares closed at 97
3/16.
''One day they're going to cut these stocks in half. Just
not right now,'' said Gary Kaltbaum, chief strategist at
JWCharles Securities Inc., who said investors should wait for
Internet stocks to lose about 10 percent, and then sell. ''Until
then, you've got to stay in them.''
Overpriced?
The puzzle is knowing how to value these stocks. A
traditional way would be looking at the ratio of a stock's price
to the company's earnings per share. While U.S. carmakers trade
at eight to nine times earnings and the Standard & Poor's 500
Index trades at about 23 times projected earnings for this year,
Yahoo is off the charts at 310. At least Yahoo has started making
money. Internet companies that haven't yet, such as At Home
Corp., are even harder to value.
Some say it's unfair to value Internet stocks by traditional
standards. ''It's a new market, an emerging market,'' said Lary
Aasheim, a money manager at Rorer Asset Management, which
oversees $3.3 billion. ''What you're buying for is what your
business will be five years from now.''
At Home, for example, is in an investment phase, he said.
The Internet-access company must spend money to make money,
buying equipment and paying its staff. Shares of the Silicon
Valley startup tripled since it went public in July, as its loss
narrowed.
Aasheim said he recently bought America Online Inc. because
it makes money and has 13 million subscribers. Internet companies
stand to make a fortune on advertising as more people use the
Web, he said. ''It's only a matter of time.''
Short Interest
Many investors, however, are so sure Internet stocks will
fall that they are ''shorting'' them. In a short sale, an
investor borrows shares and sells them, hoping the price will
fall. If correct, the short-seller will be able to buy back the
shares later at a lower price, pay back the loan and keep the
difference as profit.
Infoseek Corp., a Web guide that gained 260 percent during
the past year, had its number of shares held by short sellers
jump 167 percent from Feb. 13 to March 13. Short interest in
Egghead.com Inc. was up 208 percent that same month. Egghead
shares jumped as much as 93 percent since Jan. 28, when the
computer equipment company said it will sell only over the
Internet.
Yahoo!
David Kleinbard, a business school student in College Park,
Maryland, shorted $50,000 of Yahoo shares, some when they traded
as low as 60. If made to pay them back at today's price of 115,
he'd lose $25,000, he said. If they fall from these highs,
however, he'll make money.
''These Internet stocks are the latest mania, and they will
come back to normal levels,'' Kleinbard said. Based on Yahoo's
earnings and his calculations of what high-growth companies have
done in the past, he says Yahoo's fair price is about 40.
One early Internet wonder, Netscape Communications Corp.,
already has come back to earth. It reached a high of 87 in
December 1995, four months after going public. Then Microsoft
Corp. entered the Web browser business, eating into Netscape's
market share. Today, Netscape shares trade at 18.
Even fans of Internet stocks concede not all will survive
this speculative period. ''It's the one with the greatest
critical mass that wins and the others lose, so you have to be
careful which ones you pick,'' Aasheim said.
Ultimately, earnings will determine which companies succeed,
said Brian Oakes, an analyst at Lehman Brothers Inc.
Last week, Yahoo's first-quarter earnings beat expectations
and the stock rose to a record, pulling other Internet shares
with it. ''Yahoo clearly did it, and we'll see if everyone else
is going to hit the (estimated earnings) number as well,'' said
Oakes, who rates Yahoo a ''neutral'' because the stock has run up
higher than he thinks it's worth.
Oakes is watching for earnings reports on Thursday from
Excite, which he rates a ''buy'' because it has room to grow, and
on April 21 from CNET Inc., a Web media company that he rates
''neutral.''
''If they don't hit the high end of expectations, then I'd
look out for a drop,'' he said. ''You could see a 10 to 20
percent pullback if they don't.''
For many unbelieving investors, that drop could be just the
beginning.
--Vernon Silver in the New York newsroom (212) 893-3037 with reporting by Phil
Serafino.ltk.dp
bloomberg.com |
