With net stocks soaring and academics pointing towards traditional valuation metrics to justify their doubt in the future performance of these companies, I present the single reason that Internet stocks have soared so high, and will continue to soar. In the spreadsheet below, you will see the 20 largest net stocks, including America Online. As of November 23, 1998, if an investor wants pure exposure to the greatest revolution since the industrial, they must own one of these stocks.
Quite simply, there are not enough of these stocks to go around. As you can see, these 20 companies represent a total market cap of a little over $90 billion. That means the entire Internet sector combined would only be 23rd on the list of S&P 500 stocks ranked by market cap. When you factor out stock held by insiders, that number falls to under $60 billion. With well over $10 trillion in assets invested in US securities, if investors think that only 2% of their portfolio should be allocated to the Internet, these stocks would quickly triple in price. Supply and demand, its that simple!
So when will the fundamentals catch up? Either there will have to be a fundamental shift in supply or demand. The first does not look to be happening any time soon, and the second is only likely in the event of global economic crisis. You want valuations? Forget about it, play supply and demand!
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