For the Net, 1999 May Prove a Far Different Year
By James J. Cramer
12/28/98 12:15 AM ET
Will 1999 be the year when Net businesses have to become real businesses? Or is the future just that certain for e-commerce that it will get a bye again as it did in 1998?
Right now the dichotomy in the market between what a Net company has to deliver and what a bricks-and-mortar company has to deliver is enormous. A portal site, for example, doesn't even have to show any chance of profitability right now for its stock to go higher; it just needs to continue to issue press releases in a cadence that pleases the on-line traders. An e-commerce store doesn't have to have profitability or same store sale upticks (even Wal-Mart (WMT:NYSE) needs those); it just needs to have visitors. Heck, it doesn't even need sales right now, just a good Net alliance or two.
And a site that's a stock just needs to be teased and then appear on CNBC and its name goes up in the lights reserved for biggest percentage gainers and volume leaders. Then insiders can sell at will into the inflated price. Never has the ink on a press release been worth so much to one group of stocks in the history of public relations! Never has the market been less skeptical toward the bilge that passes for spin and hype. (Yes, I am revolted by it, as I am a true believer in the Net but know that I will be washed away in releases if this keeps up.)
So, how will we know when the Net will be graded by more serious taskmasters? The Net's rise has been like no other surge/mania/move that I have ever seen. But we have had more than our fair share of supply-created-to-meet-
insatiable-demand situations, and they do all end badly.
Let's catalogue the rise and fall of three of them, the biotech craze at the beginning of this decade, the gambling craze in the middle and the restaurant craze that lasted for about ten years.
The biotech craze was pretty fabulous. You had established mutual fund managers taking a couple of stocks to the multi-billion dollar market cap on the hope of blockbuster drugs, even though only two of them have really broken out -- Epogen and Neupogen from Amgen (AMGN:Nasdaq). (I will stipulate that there have been others but nothing really blockbuster.) Like the Net, nobody gave a rat's rear about earnings, but biotech had benchmarks, too, mostly clinical trials. And as one drug compound after another flunked the trials, the group's move evaporated and the companies were unable to tap the secondary market for capital. So there the undoing was a lack of results.
Gambling involved a change in the laws that allowed everybody and his brother to get a riverboat and a license. Here there were dozens of start-ups, all of which reached multi-hundred million capitalization before they, too, were done in by disappointing results. Took a couple of years, but nobody made the promised money, and the group was eventually slammed.
Restaurants took forever to implode. There was so much money raised and so many opened that it was only after there were too many Planet Hollywoods (PHL:NYSE) that the group vaporized (see the excellent article in Sunday's New York Times about the unraveling of this group.) But for the longest time these chains kept the balls in the air despite really terrible fundamentals.
Nevertheless, these templates offer us some instruction about when the Net mania/surge/move will end. First, market capitalization has nothing to do with it. Heck, Amazon (AMZN:Nasdaq) could trade to $40 billion and not be overvalued if there is a chance that it can be the worldwide Wal-Mart with no inventory that makes money off the float [that's the key by the way, as it gets paid before it has to pay its suppliers, just like Home Depot (HD:NYSE)]. Second, there are no milestones like clinical trials to derail this group. The results can remain open-ended and continue to please investors and traders.
But both the casino and the restaurant model could be spot on for what to watch with e-commerce. Both casinos and restaurants initially blew numbers away. There were huge crowds in the casinos, and the lines outside the restaurants were their own best advertisements.
The food at the restaurants, however, ruined the novelty and after everybody had tried it once, there really was no reason to go back. The casinos? Too many of them and not enough differentiation led to their downfall. Took a couple of years for both to happen, but it happened nonetheless.
For the Net to survive the restaurant/casino gauntlet, it must continue to offer great value, great price, tremendous convenience, and a way to make big money. We know that AOL (AOL:NYSE) does that, as the incredible survey that AOL's Bob Pittman released a couple of weeks ago showed. AOL could double its price, charge for e-mail, make people pay for instant messaging and not turn off its persistent customers.
But how about the others? I love AOL because I know they could do all of those things and really turn on the profitability. But how about Excite (XCIT:Nasdaq)? Could it ever charge? I don't think so. It is too much like Yahoo! (YHOO:Nasdaq), which is too much like Lycos (LCOS:Nasdaq), which is too much like Infoseek (SEEK:Nasdaq).
E-Bay (EBAY:Nasdaq)? How about if a dozen other companies can tap into cheap capital via the stock market and set up sites that pay you to come to them? That would stab E-Bay right in the chest. Same with On-Sale (ONSL:Nasdaq).
You see, the problem the Net will face in 1999 is that capital will get too cheap for its own good. As long as companies can issue a release and get capital, all the other companies on the Net are threatened. As long as the stock market remains too buoyant for this sector, this sector will eventually be doomed.
How soon? As soon as the bankers can figure out how many companies to flood the chute with, as they did with the restaurants and the gambling houses. In the end, the cheap capital led to a kind of Gresham's law for restaurants and casinos as bad casinos and restaurants drove out the good. This will be the year when the Net eats itself unless the door gets shut and nobody else can go public.
Right now, the ease with which money can be printed for the sector makes me nervous that all but AOL could be in for hard times next year. And I am long a bunch (including AOL, Yahoo!, and Amazon.) It is forcing me to keep one finger on the eject button at all times.
I wish I could be more sanguine about the Net's prospects, but the over-exuberance for every press released and every appearance on CNBC's "Squawk Box" tells me the market is just plain dysfunctional right now. No way that dysfunction will be cured without some bloodshed. No way |
