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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