Here's some interesting reading. I couldn't find it at the National Post site so I have summarized here.
Don Tapscott, as many of you will know, is a leader in the discussion on the future economy and the impacts of technology on such. He has authored numerous books, probably the most prominent being "The Digital Economy". He writes an article each Saturday in the National Post - Financial Post section.
The headline for this week's article "Prudent investors will hold three kinds of Net stocks"
Remember, these are excepts"
Given the wild ride that Internet stocks took on the markets this week, does this mean the naysayers are right - that Internet stock prices are all based in hysteria and hype?
After all, seemingly overnight the market capitalization of on-line auctions, bookstores, brokerage firms, and portals eclipsed the titans of auto, steel, energy, manufacturing and even finance. They achieved unprecedented price earning ratios and stock appreciation.
So was it a boom too good to be true, and should we now be bracing for the big Internet bust?
Not at all. The rationale underlying the enthusiasm for internet stocks remains solid gold. Yes, there will be considerable volatility - as we've just seen. And there will be big losers, not just winners. But overall and over time, the companies that tie their fortunes to the Internet have but one way to go - up.
Their valuations will reflect fundamental underlying changes in the economy and market. Ridiculing the rush to Net-based companies is akin to ridiculing GE, Ford, RCA and Standard Oil a century ago.
Just like the electrical power grids and road provided infrastructure for new business models and a new economy, so networks are providing the infrastructure for changes of comparable or even greater scale. The way businesses are functioning and creating wealth is being transformed. One third of the global economy will run on this infrastructure by the year 2010.
Some of these unprecedented valuations are wacky, but overall they make sense. For example, information technology and networks are eliminating the inventory cycles and other causes of business cycles and recessions, thereby creating the conditions for sustained economic growth. The resulting greater predictability drives up P/E ratios, especially for the high growth companies embracing network-based business models.
So if an old measure like the P/E ratio isn't appropriate, and Internet stocks seem to be a rocky ride, what's a prudent investor to do?
First, realize that there are really three types of Internet stocks. Any prudent investor should be holding all three. Call them "new business model" stocks.
The high-profilers like Amazon.com, eBay, E*Trade and Yahoo are one type- pure Internet plays. These companies did not exist before the Internet, their whole business model is built on the internet and all their revenues are derived from transactions on the Internet. Although share prices were battered this week, they have all appreciated magnificently from their levels a year ago. And any still have massive growth potential.
The second type is the traditional bricks and mortar companies which are successfully changing their business model to seize the opportunities offered by the Net. Examples are FedEX and Schwab.
The third type of Internet stock investment is in the companies that make switches, routers, modems, software and other technology critical to the Net's operation. Examples include Cisco Systems and Celestica. By 2003, the total volume of commerce on the Web will top $1 Trillion. It is good sense to invest in the companies that are building the billions of dollars of Internet infrastructure to enable this.
Many decades ago the steam engine came along. One group said: "No way, we're sticking with horses. There will always be a need for them."
The other group said: "Looks promising. we will invest in railroads. And in the companies that build locomotives. and in the products shipped by rail. And in the new communities that will be build in the new territories opened by the railroad."
The risk strategy was to stick with the stables, saddles and blackmiths. The conservative approach was to invest in the emerging economy. |
