Interesting article on Internet Stocks
An article from YHOO thread:
zdii.com
To understand the mercurial growth of Internet stocks in the past year, investors must first throw out all their preconceived notions of what makes a company a sound investment. Little things such as earnings and a predictable track record pale in comparison to hype and greed.
But that bubble could easily burst.
On Wednesday, Yahoo! Inc. (Nasdaq: YHOO) will release its second quarter results with most analysts expecting earnings of 9 cents a share. But this quarter's results will have ramifications that extend far beyond Yahoo! and even the Internet sector as a whole. To merely meet the estimate or fall shy by a penny or two could erode all the incredible gains made in the first half of the year.
Financial analysts are as bewildered and amazed as any investor. When the stocks of companies barely making a profit or-as in the case of most Internet companies-losing millions each quarter are enjoying triple-digit growth in a six-month span, all the charts and fundamentals are thrown out the window.
"The average investor doesn't care about profitability right now and rightfully so," said Derek Brown, an Internet stock analyst at Volpe Brown Whelan & Co. "They see companies like Yahoo!, Excite and Lycos at the forefront of an emerging medium with unlimited growth potential. There's no way to handicap those types of possibilities."
Indeed, Yahoo! shares have improved from 22 a year ago to more than 193 Monday afternoon. The stock was only trading at 100 in early April. By week's end, it's conceivable that Yahoo! shares might be trading 10 times higher than they were at this time last year.
"I've never seen anything like this and I don't think anyone who has followed the market in the past 20 or 30 years has seen this staggering amount of growth," Brown said. "It's truly an amazing world these stocks are trading in."
Yahoo! only earned $4.2 million, or 8 cents a share, on sales of $30 million in its first quarter. Old-school analysts will tell you that a company is generally considered overvalued when trading at 42-times its earnings in the previous year. By Monday afternoon, Yahoo! was trading at 43-times its calendar 1999 revenue.
How is this even possible?
Investors are always looking for that one big score. Many have lamented not buying Microsoft Corp. (Nasdaq: MSFT) in 1984 when it was a relative unknown or getting on the Iomega Corp. (Nasdaq: IOM) freight train just a couple years ago. These investors see Internet stocks as the next bonanza, often comparing them to the likes of NBC or CBS in the early 1950s.
"We've had a "neutral" rating on Yahoo! for about six months," Brown said. "We love the company, but all the information showed that it had to continue its flawless execution to maintain its value at the time. Now, it's up 100 percent since then and we still can't upgrade it. There's too many things that can go wrong."
Another key factor to this Internet madness is something quite familiar to the prudent economist: Supply and demand.
Sure, Yahoo!'s gaudy market capitalization of almost $9 billion is impressive, but consider there are only about 46 million shares outstanding. By comparison, Apple Computer Inc. (Nasdaq: AAPL) has about 133 million shares outstanding and Dell Computer Corp. (Nasdaq: DELL) has more than 630 million shares outstanding.
Clearly, those fortunate enough to own Yahoo! or Excite Inc. (XCIT)-which has only 24.7 million shares outstanding-want to hold on to them. When in everyone in the world is projecting these stocks as the next Intel or Microsoft, demand pushes these stock prices to surreal levels.
"The relative scarcity of these stocks is compounding an already hot market," Brown said. "In the past six months, the general awareness of these companies and their business models has attracted everyone's attention. And to hold a secondary offering to get more shares in circulation doesn't make much sense when demand is so high and profits are so small."
Not only are there very few shares available, but there aren't that many pure Internet stocks to play. Amazon.com Inc. (Nasdaq: AMZN), the search engine stocks and a handful of online retailers are about it. Throw in the Internet service providers such as MindSpring Enterprises Inc. (Nasdaq: MSPG) and EarthLink Network Inc. (Nasdaq: ELNK) and you come up with maybe 12 or 15 Internet stocks on the board.
"There's too much money chasing too little stock," said Bill Schaff, an analyst at Bay Isle Financial Corp. "Every mutual fund wants Internet brand names and there are only a few."
"That's a recipe for huge runs, but it's not sustainable and it's not justifiable," he said. "When it breaks it will really break."
Which brings us back to Yahoo!'s second-quarter results. Yahoo! has made a habit of comfortably beating estimates each and every quarter. It attained profitability ahead of analysts' expectations and continues to grow its revenue base faster than even the most optimistic estimates.
If Yahoo! were to miss its numbers this time around, the impact would be disastrous.
"That would definitely be bad, very bad," Brown said. "It's impossible to guess at what the impact would be, but these stocks are disproportionately affected by any news. A disappointing quarter would probably set off a major sell-off throughout the sector."
Source: Inter@ctive Investor |
