Silicon Valley: Net Stocks: Waiting for the Other Shoe to Drop
By Suzanne Galante
Staff Reporter
11/20/98 10:36 AM ET
SAN FRANCISCO -- When the air finally comes out of Internet stocks, will it drag down the rest of the market?
It's a question that affects even the investors who have soberly refrained from the bacchanalian surge in Internet stocks in recent weeks. To most of those investors, the rapid rise of Net stocks to levels often impossible to value smacks of speculation -- the kind of speculation that can send shock waves through the market when it all comes crashing down to Earth.
This time, investors and analysts say, the impact of any tumble in the Internet sector will be limited. Take recent IPOs EarthWeb (EWBX:Nasdaq) and theglobe.com (TGLO:Nasdaq), which caught the limelight last week when their stocks rose several times over on their first days of trading. Since then, they've plummeted in relative silence. EarthWeb is down 45% from its high of 85 1/16 on Nov. 13, and theglobe.com is down 57% from its high of 97 on the same day.
Most fund managers had written off the latest round of Net rallies before it started, so most will shrug it off when it ends. "The Internet stocks didn't save us or bring us out of the quagmire," says Jay Ferrara, who manages the Principal Preservation PSE Tech 100 fund. "They don't drive the direction of the U.S. stock market."
True, some of the industry bellwethers that institutional investors like to hold are rallying as well. America Online (AOL:NYSE) is up 95% since Oct. 8, while Yahoo! (YHOO:Nasdaq) is up 76% and Amazon.com (AMZN:Nasdaq) is up 75% -- each shattering the highs they set in July before the subsequent market selloff. If they started to tumble again, "They would be able to weigh down the techs," says an analyst who asked not to be identified.
Outside of technology stocks, the impact would be small. "Even if this bubble does pop," the analyst says, "it's still a pretty small sector."
Calling the top of a speculative rally is tough, but many agree that nothing is likely to douse these hot stocks for some weeks. In the meantime, the sector can only continue to feel good about the holiday season. Expectations of strong revenue from online shopping during the coming holidays have powered the gains in most of the Internet stocks.
So high have those expectations risen that the pinprick that finally bursts this bubble could come after the holidays, no matter how strong online sales are. "Everyone is expecting an e-Christmas," says a hedge-fund manager who asked not to be identified, "but if it doesn't follow through, that will bring some selling in."
Even if this rally extends into next year, it's unlikely to last long beyond that. The growth rates that have made many Internet stocks attractive to some investors -- with revenues doubling or tripling each year -- will start to slow down. "As we get into next year," says Michael Wallace, an analyst at Warburg Dillon Read, "the comparisons are going to be tougher."
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For more info on institutional holders of these stocks, as well as financial statements and earnings estimates, please see the Thomson Company Reports.
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See Also
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