TALKING POINT - Internet stocks spur value rethink
By Huw Jones
NEW YORK, April 20 (Reuters) - The relentless rally in Internet stocks is being fueled more by hope than hard facts as analysts rethink ways to define value in new shares that keep rocketing.
''We are starting to get into nosebleed territory,'' said Arthur Newman, an Internet equities analyst at Gerard Klauer Mattison. ''The enthusiasm is incredible.''
''They all have very exciting prospects, and that is what keeps putting them up more than any kind of financial analysis based on fundamentals,'' Newman said.
Internet stocks rallied sharply last week but there was some profit-taking Friday. Despite the profit-taking, many ended the week significantly higher.
Investors took comfort from a U.S. government report released last week which said that commerce on the Internet could surpass $300 billion by 2002.
Monday, the American Stock Exchange's index of Internet stocks (^IIX - news) gained 2.09 percent to hit a new lifetime high of 326.10 points. A new lifetime high was previously set last Thursday.
Tom Morabito, an analyst at Ferris Baker Watts said the rally resumed after brokerage Donaldson Lufkin and Jenrette set a six to 12 month price target of $150 per share on Yahoo! Inc. (YHOO - news).
Monday afternoon, Yahoo! closed at 125-3/4, up 4-1/4.
''It's become like the Baby Bells the way the Internet stocks are all traveling together,'' Morabito said. ''Yahoo is the most overvalued stock I have seen, already trading at 40 times revenues.''
Internet stocks are now becoming a sector with their own momentum that rubs off on any stock that comes in contact with them, analysts said.
K-Tel International (KTEL - news), the music company, was cited as one example. The company's stock has soared since it said last week it would sell products on the Internet.
Monday afternoon, K-Tel topped the most active list on the Nasdaq. It closed at 41-5/8, up 12/15.
''K-Tel defies all parameters and we are keeping away from it,'' said Conley Turner, an analyst who tracks Internet stocks at Wall Street Strategies.
The Internet sector has become a ''new paradigm. In terms of fundamental valuations, they are way beyond (normal levels),'' Turner added.
Analysts try to compare stocks in the sector by looking at revenues rather than earnings because many are still lossmaking start-ups. But even this measure is not foolproof.
''These things are trading on expectations rather than on any multiple of revenues or otherwise,'' Newman said. ''The risk is when there comes a change in expectations.''
''What you are trying to do is ... to assess a company's prospects in a brand new, rapidly developing industry, and you are laying your bet on an analysis of what kind of prospects you think they have,'' Newman said.
Some investors look at the ''hit ratios'' or ''click-through ratios'' or ''audience ratios'' to calculate how many people use the service.
''This is causing the investment community to totally change their thinking,'' Morabito said.
Donaldson Lufkin & Jenrette looked at traffic rather than cite specific earnings forecasts when it raised Yahoo!'s stock's price target Monday.
''By any definition, Yahoo! operates the strongest brand on the Internet and has managed to translate that brand and its immense user traffic into a robust cash-generating franchise whose growth is only matched by its scalability,'' a source at Donaldson said.
The so-called ''enterprise value'' is also used by many investors, Morabito said. This number is derived by adding the company's market capitalization and debt, minus cash and divided by revenues.
Last week, more traditional market-moving factors such as rumors of alliances and takeovers in the Internet sector helped to fuel the buying frenzy.
The rally itself is also attracting momentum players -- the investors who don't want to be left out of any party.
Internet stocks will continue to be volatile until they begin to turn in reasonable earnings, said Ken Fleming, a research analyst who covers Internet stocks at Renaissance Capital IPO Fund.
''These companies are growing very rapidly and investors are looking for alternatives to the large cap stocks which are somewhat pricey,'' Fleming said.
''The justification is that the potential of the Internet is so huge that it's unlike anything that we have seen in some time,'' Fleming said. ''I don't know if that necessarily justifies the prices, but that's the thinking anyway.'' |
