From ETRADE STOCK BRIEF:
Stock Brief
Updated: 17-Apr-98
Netmania
To say that the recent rush into Internet stocks is completely rational strains credibility. The
momentum-driven mentality of the Net-rush now has traders sifting through the dregs of
the Internet world for stocks that have missed out on the recent run. How else can you
explain yesterday's surge in such past blow-ups as CKSG, SPYG, and CNWK? That's
not to say that the rally in these specific stocks is unjustified, it's only making the point that
the buying has become completely indiscriminate.
We have seen such an Internet stock bubble before. Go take a look at the charts of
Netscape, Spyglass, UUNet, and Netcom in late 1995. That bubble popped in ugly
fashion early in 1996. We don't know when the current feeding frenzy will end, but when it
does, you will be in much better shape if you pick the 1998 equivalent of AOL (AOL was
near 20 in late 1995; it's at 75 now) rather than Netscape (85 in 1995, 25 now). In sorting
out the likely winners and losers, it's important to differentiate between Internet stocks.
Let's focus on just two Internet sectors today -- search engines and retailing.
YHOO vs AMZN
In the not-too-distant future, we will look back and laugh at the concept of an "Internet"
stock. The Internet stock world is not homogeneous. Dumping such companies as Yahoo!
and Amazon.com under the "Internet" banner is like combining Kimberly-Clark and the
NY Times under the heading "Paper." Yahoo! is a media company and Amazon.com is a
retail bookseller. Their medium is the Internet, but that doesn't mean the companies face
the same challenges or opportunities.
The Problem With Commodities
Looking out two years, which sector -- search engines or retailing -- is the better
investment? We'll choose the search engines without hesitation. We'll start with an
anecdote to justify our position. Today, in our quest to buy two books, we went to the site
www.acses.com. We entered our book titles and within seconds we were presented with
a list of online bookstores that offered the titles, starting with the cheapest price and going
up from there. We found that a store called All Direct books offered the best price, so we
punched in the credit card #, and the books should be in the mail shortly. We then went to
Amazon.com and found the same books listed for 23% more.
We know the response to this criticism -- Amazon.com has the brand recognition. How
many people have heard of acses.com or can even pronounce it? These are fair points.
For now. But they illustrate the problem that Amazon, CDNow, N2K, Egghead, and
other online retailers will face for years to come. They are all in commodity businesses, and
while a strong brand name helps to bring in traffic now, pricing might ultimately be king. Is
there any question that shopping agents like acses.com will proliferate in coming years?
There might even be a shopping browser, designed only for the purpose of finding you the
lowest price book, CD, airfare, PC, whatever. In that brave new world, Amazon's brand
is not worth much more than that of All Direct if its prices are 23% higher. So what will it
be, lower margins or less sales?
No Competitive Pricing Here
Now let's consider Internet media companies, of which search engines are the most
prominent subset. In this world of advertising-driven revenue models, price is not an issue.
Branding and content are the only issues since there is no charge to the end user. On both
fronts, Yahoo! is in a league of its own. Their brand name is unparalleled and their
approach to content (simple design, low graphics, high quality) keeps us all going back to
quote.yahoo.com time and again. Excite, Lycos, and Infoseek are all vying for second
place, but they have much lower price/sales ratios to reflect that reality, and second place
in this business ain't too bad. Unlike the retailers, the search engines' margins will grow as
their usage grows, and it will be extremely difficult for future competitors to challenge their
brand names, and impossible for them to compete on price (it's already free!).
Where To Be When It Blows
Internet mania is justifiably boosting the valuations of many solid companies with bright
futures, but it is sweeping many weak companies higher as well. We would never short any
of these stocks given the potential for the current momentum to carry every company that
utters the word Internet up 10 points per day, but this mania will eventually end, and as
was the case with the buying, the selling will be indiscriminate. If you're going to take the
risk of holding these stocks when the blow-up comes, you might as well own the ones that
have a future. We would take the search engines over the retailers any day.
Parting Shots
More on the processor speed vs bandwidth battle: Intel's revenues and earnings
look set to continue their slide, while At Home (ATHM) reports last night that
sequential revenue rose 57% and subscribers rose 80%. The only good news for
Intel is that they own a good chunk of ATHM.
On a related note: we failed to mention the upcoming Merced chip (expected in the
second half) in Wednesday's Intel Brief, but suffice it to say that if the Pentium II
couldn't stop the revenue slide, Merced won't fare much better. Remember -- it's
the bandwidth, stupid.
Hats off to our Y2K man who has been right on about the systems integrators vs
tools debate. Keane reported another blow-out quarter, while Viasoft just got plain
blown-out.
Check out the new format on the Tech Stocks page if you haven't already. In
addition to the Briefs on each sector covering news of note, we now offer
forward-looking bullets pointing you to likely movers in the days ahead. |
