Fever is cooling for Net stocks, Totally frightening times.
New York Times
George Nichols, a 22-year-old management major at the Georgia
Institute of Technology, put more than $1,500 of his student loan
money in a mutual fund investing exclusively in high-flying Internet
stocks.
Shalin Madan, 23, left his job as an accountant at State Street
Bank in San Francisco to become a full-time ''day trader,''
moving his money frantically in and out of stocks like America
Online, Amazon.com and Yahoo, often every few minutes.
Jill McKinney, a 27-year-old employee of Silicon Investor, an
Internet site devoted to technology stocks, recently got an excited
recommendation from a taxi driver in Seattle to invest in
Broadcast.com.
As such delirium has spread, Internet stocks have soared. Shares
of newly public companies like Marketwatch.com and
theglobe.com have risen threefold or fourfold in a day; more
established companies like Yahoo or Amazon.com have more
than doubled in the last three months. Marketwatch.com now
sports a market value of nearly $950 million -- bigger than such
established companies as Reebok, Polaroid and Tupperware.
And on Friday, three Internet-related initial public offerings
soared -- Covad Communications Group, of Santa Clara,
jumped 152 percent; Nvidia Corp., of Santa Clara, climbed 70
percent; and Allaire Corp., of Cambridge, Mass., rose 119
percent.
But this week, a bit of the air leaked out of what many Wall
Street pros call the Internet bubble, with some high fliers, like
Amazon and America Online, falling sharply from recent highs.
And while most of the stocks are still ahead for the year, many
analysts are warning of a steep decline that could rattle the wider
market.
That is because Internet fever has spread in recent months to
technology companies and an even broader swath of the market.
And it leaves investors in 401(k) plans and mutual funds who
have not bought into companies with dot.com after their names
increasingly vulnerable.
The latest warning about an Internet sell-off comes from Barton
Biggs, a Morgan Stanley strategist who has been bearish on the
market for some time. ''I promise you, like all bubbles, this
bubble will come to a very bad end,'' he said Thursday.
If it does, it is not just Amazon and Broadcast that will suffer.
Pension and fund managers who are worried about the high
prices of Internet stocks or who are having trouble buying large
stakes in these small companies have driven up the stock prices
of companies like Cisco Systems, of San Jose, which builds
equipment that connects computers to the Internet, and Oracle, of
Redwood Shores, whose database software is used by many
online retailers.
In the stratosphere
Even more cautious fund managers have turned to companies like
Walt Disney, CBS and Sotheby's that have only the most
tangential connections to the Internet. When Disney unveiled its
Internet joint venture with Sunnyvale-based Infoseek Corp., Go
Network, earlier this month, investors bid up Disney's market
value by $5.6 billion.
While valuations of Internet stocks remain in the stratosphere,
those of technology stocks have doubled in the last three months.
And those of broad market indicators like the Standard & Poor's
500-stock index have leaped by 50 percent.
The prices of Internet stocks have risen so high so fast that even
analysts enthusiastic about the Internet's long-term effect on the
economy have warned that prices in the entire sector are likely to
fall more than 50 percent.
A sharp, widespread decline would cause headaches for
regulators and could cause problems for many online investors,
who dominate the trading in many Internet stocks. Already, a
group of senior officials from several big Nasdaq trading firms has
met to discuss recent volatility among the Internet stocks, virtually
all of which trade on the Nasdaq stock market.
Several brokerage firms have acted to squelch speculative trading
by restricting online transactions. Among other things, they have
made it more difficult to borrow to buy Internet stocks and put
certain limitations on initial public offerings.
Last week's initial public offering of Marketwatch.com, which
provides financial data to Internet sites, was one of the hottest
ever. The shares were initially offered to select investors at $17,
but public trading opened on Jan. 15 at $90. The stock finished
the first day at $97.50 but has since fallen to $80.50. That means
most investors who bought after trading began have suffered
losses, as have recent arrivals to most Internet stocks.
Richard Hoey, chief economist at Dreyfus Corp., recalls that a
similar frenzy for computer stocks emerged in the summer of
1983, about the time the personal computer was introduced. But
few of the favorites then -- like Prime Computer and Coleco --
are around today.
''The enthusiasm over the growth of technology as an industry
was very well founded,'' Hoey said. ''But we learned that today's
hot stock is not necessarily a long-term winner.''
Huge multiples
Judging by market values, though, few Internet stock prices
reflect the possibility of failure. Other Internet companies have the
same huge multiples. Yahoo is worth $35 million per employee,
and eBay, a San Jose-based Internet auction site, $61 million.
That compares with $14 million at Microsoft and $5 million at
Coca-Cola.
Even some who are certain the Internet will bring about
fundamental changes in the economy say there is no sense to the
huge valuations.
''The Internet is making huge changes in how we live our daily
lives,'' said Lise Buyer, an analyst who follows Internet companies
at Credit Suisse First Boston. ''But there is no way to correlate
what is happening with these stocks to the underlying businesses.
What we have is a mania.''
Internet stocks shifted into overdrive on Dec. 16, when a
little-known Wall Street analyst, Henry Blodget, stirred investors'
speculative juices with a seemingly outrageous prediction.
Blodget, a 32-year-old financial analyst at CIBC Oppenheimer,
forecast that Amazon.com, whose shares were then trading for
$242, would reach $400 in 12 months. They surpassed that level
in early January, and the stock split.
Even though Amazon shares have since fallen, they are up 52
percent since Blodget's report when adjusted for the split. But he,
too, says Internet stocks are ahead of themselves.
''I don't think there's a sector in history that's been valued at
these heights,'' he said. ''It's totally frightening.''
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yes, remember last summer when most tech stocks went down 1/2 of their values in a week. It's likely going to happen again. CSCO at 60$. all imo. |
