AOL is still being recommended at these levels:
AMERICA ONLINE INC
NEW YORK, NEW YORK, U.S.A., 1998 NOV 29 (Newsbytes) -- By David Henry, USA Today. Are millions
of Americans starting their holiday shopping on the Internet this weekend? There's a lot of money riding on
the notion that they are.
Speculators have bid up the already fancy prices for shares of Internet companies to spectacular heights the
past six weeks and Wall Street pros are stunned. They say prices are so high that buyers have moved
beyond speculating on the future profitability of the Internet to simply gambling that more suckers will join
the frenzy.
The Inter@ctive Week index of Internet stocks is up 78 percent since Oct. 8. Stock of Amazon.com, the
widely known book vendor which has yet to prove it can make a profit, rocketed from $126 to $210 5/16 the
past two weeks.
Shares of eBay, the online auctioneer of Beanie Babies, collectibles and miscellaneous stuff, are up 1,036
percent to $204 1/2 from their initial public offering price of $18 on Sept. 24. More than half of the gain came
within the past three weeks.
eBay's $8.2 billion stock market value is now more than the value of Kmart or Tricon Global, operator of the
Pizza Hut, KFC and Taco Bell chains.
Established media companies CBS and Gannett, publisher of USA Today and dozens more, are roughly
worth about the same in the stock market as the $20.7 billion price on Yahoo!, the Internet search engine that thinks it can pull huge audiences into its worldwide network of Web sites. Yahoo! stock is up 506 percent this year.
Why are prices soaring so? Jonathan Cohen, analyst at Merrill Lynch, says investment reasons aren't a
factor any more. Buyers are not investing but simply seeing the stocks as trading vehicles on an upward
trend. With few exceptions, the stocks are not investments anymore, he says.
Professional short sellers -- money managers who can temper speculators by borrowing shares and then
selling them in anticipation of buying them back later at lower prices -- are staying clear of the highfliers.
"It is just a question of a freight train that is accelerating," says Dave Jones of the Overpriced Stock Service
newsletter. "Short sellers are not going to get in the way."
Months ago Cohen cited Amazon.com as an example of how a stock's buzz amplifies itself. Amazon.com
doubled within four months after trading started in May 1997, generating publicity, which generated more
online sales of books. The rising sales drove the stock higher, which drove sales higher which drove the
stock higher.
Now eBay appears to be enjoying the same cycle. eBay has an added kick from some of its customers who
have started collecting eBay shares as well as the knickknacks the company auctions.
The problem is that the cycle eventually will run out of momentum.
Amazon.com has the added issue that it hasn't shown it can make enough profit on its sales to ever give
shareholders returns on investment. So far, Amazon's expenses for marketing and product development
have exceeded the gross profit margins on its sales.
Cohen says even those margins will shrink as Amazon.com encounters more competition from the likes of
Barnesandnoble.com, Borders and others. Even on the Internet, bookselling is what it has been for years: a
competitive, low-profit business.
The Internet makes selling physical goods, including books, more efficient, but it doesn't make the business
lucrative as the stock price implies. Many of the companies, and the stocks, will fare badly in the stages of
technological and marketing evolution that lie ahead, Cohen says.
In 1996, as online traffic shifted from being focused on e-mail and primitive visuals and sound toward
today's lively Web pages and commerce, most of the first-generation Internet company stocks lost 60% of
their value.
Some companies will make the coming transitions -- to full sound and video and ubiquitous consumer
connections -- Cohen says, citing as an example, America Online, one stock he is recommending.
But many companies, he says, will stumble, and their stocks will crash violently in a "broad-based
destruction" of shareholder wealth.
He worries the losses will scare away investors from the successful businesses.
Reported By USA Today, usatoday.co
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