Begionning of Barron's article.
Monday, April 20, 1998
Tulip Time
A Momentary Lapse (Some Would Call It Sanity) For Internet Stocks, But Mostly They Defy Gravity
By Eric J. Savitz
For at least a moment, sanity has returned to the Internet stocks. After Wall Street spent most of last week frantically bidding them up, on Friday the 'Net stocks hit an air pocket. In the week's final session, Yahoo! backtracked 6 57/64, InfoSeek toppled 7 1/2, Excite slumped 15 13/16 and Lycos deflated 9 9/16. That seems pretty awful. Until you consider what happened the rest of the week.
For even given Friday's reversal, the stock market seems to have lost its collective common sense when it comes to the Internet. We will certainly not be the first to argue that the valuations of most cyberstocks have reached levels bearing little relationship to their underlying fundamentals, but the observation bears repeating. We're talking tulips here. Internet investing has reached the mania stage. And while no one knows if Friday's activity will mark the beginning of the end, there seems little doubt that when reality sets in, things will get seriously ugly.
Now, make no mistake, the Internet is a force of mammoth proportions. As a report last week from the Commerce Department observed, Internet use increased more than 150% in 1997 and Internet traffic doubles every 100 days. But the recent run-up shows every sign of investor hysteria. Even after the Friday swoon, Excite last week gained 21%, to 75 5/16, Yahoo! advanced 6.1%, to 121 1/2, Lycos improved 6.6%, to 68 7/8, and Infoseek jumped 66.8%, to 36 11/16. And the enthusiasm spread far beyond the Web navigation companies. Even stumbling Netscape improved 34.7%, to 23 1/16 for the week, while Spyglass gained 32.6%, to 11 15/16, and C Net tacked on 17.8%, to 36 3/8. Moreover, trading in these stocks has reached frantic proportions; on Thursday, volume in Infoseek totaled 33 million shares -- more shares than Intel and Microsoft traded that day combined, six million more shares than Infoseek has outstanding. There's been a flat-out buying panic. Every marketing agreement, every acquisition, every analyst comment, every new business venture provides an excuse to boost Internet stock prices, and by an astounding degree. With the year less than five months old, many of these stocks have enjoyed a lifetime's worth of gains.
For a particularly vivid illustration of the current environment, consider what happened last week to K-Tel International. This is the very same K-Tel which for years has been soaking up cheap advertising time on late-night television across the land, selling both consumer goods and music compilations. Veg-o-matics. "Club Mix '97." "Greatest Sports Rock." Stuff like that. K-Tel has unveiled plans to sell the same recordings, plus any other music or compact disks you might want to buy, via a site on the Web called "K-Tel Express." In a press release announcing plans for the site, K-Tel said the strategy will be to "rely heavily on newly developed direct-to-the-consumer marketing methods as opposed to the more traditional search-engine relationships being exploited by its competitors." In short, they don't intend to do the costly Internet real-estate deals that other on-line retailers have done, which makes you wonder how people will find their site. Nonetheless, they intend to bump heads directly with the current leaders in on-line music sales, CDNow and N2K.
K-Tel issued the press release with its big news on April 9. The stock that day closed at 6 5/8, which is about where it had been, give or take a few points, for years. Trading volume for the four trading days heading into the long Easter weekend totaled 9,000 shares; on many days, the stock doesn't trade at all. That's only normal for a microcap stock with more than 70% of its shares in the hands of one individual-K-Tel Chairman Philip Kives. But K-Tel uttered the magic words "Internet commerce," and everything changed. On Monday, the stock closed a tad shy of 15. Tuesday, K-Tel shares surged to 21 5/8. By Friday's close, the shares stood at 28 11/16, up 22 1/16, or 330% in a week. Trading volume for the week topped 20 million shares-and K-Tel has a float of less than one million shares. Now, we don't want to take anything away from K-Tel. No doubt, they think their move to the Web is a good idea, and obviously some people agree with them. But consider a few modest facts. K-Tel has 3.8 million shares outstanding. At the stock's height on Friday, the company's market cap came close to $100 million, up nearly $70 million. Regina Joseph, an analyst with Jupiter Communications in New York, observes that, according to the Recording Industry Association of America, total Internet-based sales of recorded music in 1997 in the U.S. totaled $36.6 million. Now, let's assume that figure will double this year. You get a number about equal to the increase in K-Tel's market cap in a few days of trading last week.
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