Economist Magazine: Internet Stock Bubble Waiting To Burst - Rpt
Newstraders - January 29, 1999 15:12
(NewsTraders.com)-- The seemingly endless rally behind
Internet-related stocks will eventually end because there are just too
many ominous factors waiting to jolt the market back to reality,
according to the Economist Magazine.
Although the magazine didn't estimate when a "correction" would occur,
it provided a number of issues that might lead to a shakeup.
Highlights:
- Troubling valuations: Amazon.com's (AMZN) market capitalization is
greater than Texaco (TX) or all of the bookstores in the U.S., while
Yahoo (YHOO) is valued greater than Boeing (BA).
- Technology consultant Forrester research predicts that online retail
sales in the U.S. will reach $108 billion in 2003, however, that robust
figure will only account for 5% of total retail sales.
- Amazon may have a dominant brand name and winning business
model, but as competitors attack its dominance and begin to undercut it
on price, margins on sales will be severely squeezed. When consumers
begin using "bots" -- search engines that seek out the cheapest price
among a number of e-tailers -- dominant players like Amazon will feel
even more pricing pressure. "Amazon could yet become a $10 billion
business with the profits of a corner store," says the Economist.
- Much of America Online's (AOL) income is derived from
subscriptions, but what happens when Internet access becomes a free
commodity? The company might also be denied access to broadband
cable networks, which are likely to emerge as the most popular
providers for high-speed access in the near future.
- None of the popular Web portals have tried to distinguish themselves
by appealing to a defined group, like most traditional media. They
eventually might have to make that transition in order to grab a loyal fan
base, and thus profits, from fickle Internet surfers.
- Thin floats -- the actual amount of shares available for trading -- has
created further volatility on Internet stocks.
- Short sellers who have been burned have thrown fuel on the fire
because they've had to buy back positions at higher prices.
- If a sell-off happens, day traders could get smacked if online
brokerages can't handle the large volume of trades and panic might
ensue.
- The argument that many of the Web's monster stocks -- such as
AOL, Yahoo, Amazon and eBay (EBAY) -- are the next Microsoft's
(MSFT) of the Internet and thus deserve the stratospheric valuations is
somewhat troubling because none of them have a dominant proprietary
technology like the software giant enjoys. "It is hard for Internet
companies to create the technological lock-in that has made the
Windows operating system so dominant," the Economist says.
- The real winners and safer companies to bet on are ones that have
built the Internet and serve those companies mentioned above. This
includes Cisco Systems (CSCO), Microsoft, Oracle (ORCL), Sun
Microsystems (SUNW), IBM (IBM), Lucent (LU) and even MCI
WorldCom (WCOM) and ATT (T).
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