Sentiment Archive:
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April 20, 1999
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In Internet Chat Rooms,
Investors Express Shock
By SUSAN PULLIAM and TERZAH EWING
Staff Reporters of THE WALL STREET JOURNAL
"I feel like I'm on the [back] end of the Titanic as it is sinking. Hold on. This is it."
"This day trading isn't panning out the way it's supposed to."
Internet investors found out Monday what a bad day feels like, as the Web chat-room chatter by "day trader" speculators made clear.
Internet-related stocks took their biggest one-day drop ever, with the 40-stock Dow Jones Internet Index plunging 18.73%. The damage since the middle of last week looks worse, with the group down 30% and some individual stocks down even more.
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Internet Stocks Tank ... Monday's drop in some well-known Internet-related shares:
Closing
Price % Chg.
Amazon.com $158.94 -16.3%
Ameritrade 87.88 -30.3
America Online 115.88 -17.1
CMGI 214.00 -18.0
CNet 86.00 -28.3
DoubleClick 104.00 -24.7
eBay 154.13 -12.4
E*Trade 73.81 -20.3
Infoseek 45.63 -24.6
Yahoo! 163.69 -13.5
DJ Internet Index -18.7
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Until now, Internet stocks have reached stratospheric heights in part on the theory that the normal yardsticks for valuing shares -- like price to earnings ratios -- don't apply, because the growth potential for electronic commerce on the Internet is so great. But Monday showed a rethinking, at least temporarily, of that argument. Profits and revenue, it turns out, may matter to Wall Street after all, even if the economy is headed toward the Internet age.
"There's an absurd level of optimism priced into these stocks that isn't sustainable," said Michael Molnar, head of global retail sales and trading at Salomon Smith Barney.
Of course, because of the huge run-up in Internet stocks in the first quarter, the damage isn't as bad as it might seem. Even after Monday's swoon, the Dow Jones Internet Index is up 49.59% for the year.
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Still, some day traders felt the sting of a down market Monday. Ted Chase, of Valdosta, Fla., said he lost $26,000 on his holding of America Online Inc., which fell 17.1% Monday, though he's still up $37,000 in day-trading profits for the year. "It's frustrating. ... But what else am I going to do? I used to play craps," he added.
The decline of some individual stocks has been breathtaking. Online brokers have taken perhaps the hardest hit, with shares of E*Trade Group Inc., for instance, dropping 20.3% Monday to $73.8125 in Nasdaq Stock Market trading; it is now down sharply from its 52-week high of $144.50, though well above its low of $5. Ameritrade Holding Corp. fell 30.3% to $87.875, and is down from its yearly high of $188.375 but far above its low of $5.626. Amazon.com Inc. was down 16.3% Monday, closing at $158.9375, and down from its 52-week high of $188.375; while Yahoo! Inc. dropped 13.5% to $163.6875, well off its earlier high of $244 but still above its 52-week low of $24.78125.
But it's more than just panic in the Internet chat rooms that is causing investors to flee the group that until last week helped to lead the broader market to its nosebleed perch. Beginning early last week, institutional investors began dumping technology issues and Internet stocks in favor of cyclical, or economy-sensitive, stocks.
Value managers, who seek out down-and-out stocks and have shunned Internet plays, were ready to pop the champagne Monday, saying that the Internet drop was long overdue. They claim that Internet fans have been deluding themselves about the fundamental value of these companies, which would have to continue growing at astronomical rates for years to come to justify their current stock prices. "A small element of rationality is returning to the market," maintained James Gipson, of Clipper Fund. "We're having a good day today. My only question is, why did it take so long?"
The sell-off began last week when two Internet darlings -- Infoseek Corp., an Internet media firm, and Excite Inc., an Internet portal firm -- disclosed disappointing results. Infoseek reported fiscal second-quarter revenue that was lower than some analysts expected, and Excite reported first-quarter revenue that was flat with the prior quarter.
But why would fundamentals like revenue growth suddenly matter to Internet fans, who until now have shrugged off criticism that these companies were wildly overpriced?
In part because Internet stocks have risen so much that some bulls have been pulling in their horns a bit. Morgan Stanley Dean Witter analyst Mary Meeker, long a proponent of Internet shares, said in an interview last week that the big rises in some Internet initial public stock offerings had become "disconcerting." In addition, in an article in the New Yorker magazine, she was quoted as talking of a possible correction this year and comparing some Internet stocks to the tulip bulbs whose value collapsed at the end of the Dutch tulip mania.
Gary Craft, managing director of Internet investment bank E-Offering Corp., while overall still a fan of the sector, conceded, "The valuations have gotten a little excessive. In certain sectors there are speculative types of activity taking place, and stocks [ultimately] have to reflect the fundamentals."
Still, many e-commerce analysts were adamant that the nearly weeklong decline isn't the end of the road for the Internet boom. The sector has long been volatile; on Aug. 31, for example, Internet stocks plummeted 16.2% -- the previous record fall -- only to come roaring back eventually.
"This sector has always acted in a three-steps-forward, two-steps-back fashion. It's never gone straight up," said Merrill Lynch analyst Henry Blodget, who tried Monday to be the voice of calm amid the sound and fury in the chat rooms. "This is a brutal sector if you trade in and out of it. It looks like Armageddon today. But if you look at the sector as a whole it looks pretty good."
Added James Marks, e-commerce analyst at Deutsche Bank Securities, "It's hard to call this a harbinger [of a plunge] given that the gains [the stocks] had in the previous two weeks were extraordinary. They've just given up a couple of weeks' gains."
Despite the sell-off, online brokerages -- which have experienced outages in the past when their computers got overloaded by the heavy trading -- appeared to take the market volatility in stride. Although a few investors complained on chat rooms about delays in executing their orders, officials at the online firms said they didn't have any major problems handling the volume.
A spokeswoman at San Francisco-based Charles Schwab & Co., the leading online broker, said its trading system was "humming at 150%." At E*Trade, a spokeswoman said the firm didn't experience any trading delays.
Margin calls on loans made by brokerage firms to customers appeared fairly normal, based on calls to several firms. Margin loans, as they are called, enable investors to buy stocks and other securities on credit by putting down a portion of the purchase price and pledging the investment as collateral for the remaining balance. If stock prices tumble and the value of investors' portfolios fall, the brokerage firm may demand additional cash or collateral; in some cases, this can push down stock prices further if many investors have to sell more shares to raise cash.
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