As Web Investors Strategize,
IPOs Remain Unpredictable
By DUNSTAN PRIAL
Dow Jones Newswires
NEW YORK -- A year or so into the phenomenon known as Internet IPO mania, no clear strategy has emerged for investors seeking reliable profits.
The only investors virtually assured of making money on highly speculative start-up Internet offerings are the professional money managers lucky enough to buy the new issues at their offering prices.
Those venturing into the rough-and-tumble world of these stocks in the immediate aftermarket -- especially on the first day of trading -- do so at their own risk.
As recent statistics show, some aftermarket Internet IPO investors have gained handsomely. Others lost their shirts. The problem is no one seems to know which stocks are headed in what direction.
Jump to a roundup of individual tech stocks, including IBM, Oracle, Go2Net, Tricord, Healtheon and 3Com.
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"Every adult American male feels he knows how to pick stocks. They think they know things, or maybe they heard something," said Jim Melcher, president of Balestra Capital Management in New York. But in reality "not one in a hundred has a clue."
No Trading Pattern
No trading pattern has established itself among the early big winners in the Internet IPO sweepstakes. Consider that 31 of the 53 online-related new issues this year have doubled in value on their first day of trading, according to Securities Data/Thomson Financial. Seventeen of those 31 early highflyers, or 55%, have since fallen below those lofty first-day premiums, many dramatically.
But that in turn means that nearly half have added gains to their phenomenal first-day debuts.
A look at some specific stocks gives an indication of the seemingly arbitrary nature in which these issues rise and fall. MarketWatch.com Inc., for example, a San Francisco financial-news Web site and the biggest first-day gainer of any new Internet issue this year, rose 474% to 97 1/2 from 17 in its first day. The stock has since fallen nearly 40%, trading recently at 60. So investors who bought in on the first day got creamed. TheStreet.com Inc., a competitor of MarketWatch.com's in the online financial-news business, seems headed in the same direction. The New York company shot up 216% to 60 from 19 in its debut last week. But the stock has since shed 22%, trading recently at 47.
At the other end of the spectrum is online airline-ticket reseller Priceline.com Inc., which jumped 331% to 69 from 16 on its first day, and has since nearly doubled those early gains, trading recently at 130 1/2. Healtheon Corp., which makes software that allows health-care companies to transfer data over the Web, has soared an additional 52% from its first-day closing price of 31 3/8. The stock, which priced initially at $8, traded recently at 57.
Discounting an IPO
Just to put these Internet niche percentages into perspective, consider that underwriters generally try to price a new issue so that it will jump about 15% on its first day. The process is known as discounting an IPO. "It's not done with the intent of leaving money on the table with concern to the issuer. It's done because investors are providing the issuer with capital to grow a business and [the investors] are looking for something in return," said Michael Essex, head of equity syndicate at McDonald & Co. The traditional 15% bounce also helps give the stock some upward momentum in the aftermarket.
So what's causing the spectacular runups in some Internet stocks, and dramatic plunges of others?
Balestra Capital's Mr. Melcher says the main reason new Internet issues are so volatile is because retail investors who are buying in the aftermarket -- many of whom buy online -- tend to buy the stock rather than the company. In other words, traditional research methods have been thrown out the window in favor of momentum buying. If a stock is moving up, buy it. If it's skidding, sell it.
That dynamic has left many new Internet issues at the mercy of little more than the shifting moods of novice so-called day traders, most of whom don't intend to hold a stock as a long-term investment.
Institutional buyers, on the other hand, are at a far greater advantage in terms of picking the potential winners and losers of the nascent online marketplace. What's more, they win even when they buy the losers. Realizing that most online issues will probably double in the first day of trading, the institutions can buy the stocks of questionable companies at the offering price, and then sell -- or flip -- the shares for huge profits once aftermarket demand has driven the stock sky high.
Notwithstanding a few recent exceptions involving Web stocks that collapsed immediately, that institutional strategy has held firm for months. And until retail investors become more selective, analysts don't expect the formula to change.
This week's calendar includes:
Online toy retailer eToys Inc., based in Santa Monica, Calif., is selling 8.2 million shares through lead underwriter Goldman, Sachs & Co. The shares are expected to sell at $10 to $12.
Cais Internet Inc., Washington, which provides high-speed access to the Internet via digital subscriber lines, plans to sell six million shares via Bear, Stearns & Co. Price talk is $14 to $16.
Redback Networks Inc., Sunnyvale, Calif., which also provides systems for high-speed access to the Internet, is issuing 2.5 million shares at $18 to $20. Morgan Stanley Dean Witter is lead underwriter.
Friday's Market Activity
In the technology sector Friday, the Nasdaq Composite Index lost 54.14, or 2.1%, to 2527.86 and Morgan Stanley's high-tech 35 index fell 27.01, or 2.6%, to 1028.39. The Dow Jones Internet Index slid 6.95 to 263.72.
Among blue-chips, International Business Machines gave back 6 3/4 to 239 1/4 on the New York Stock Exchange, after marching into record territory Thursday. Hewlett-Packard fell 2 13/16 to 84 3/16, also on the Big Board.
"Everything I am looking at, with very few exceptions, is taking a little bit of a bath right now," said Louis Mazzucchelli, analyst for Gerard Klauer Mattison.
Elsewhere, Oracle rebounded 7/8 to 23 7/8 on Nasdaq, after falling 2 5/16 on Thursday amid fears of an earnings warning. Friday, Goldman Sachs & Co. analyst Rick Sherlund trimmed his earnings estimate for the database-software giant's fiscal fourth quarter to 32 cents a share from 33 cents, according to a research note. Mr. Sherlund also cut his fiscal 2000 earnings estimate -- to 95 cents from $1.05 -- but maintained his market outperformer rating. The revised views follow the database software company's annual analysts' meeting after Thursday's market close.
Warburg Dillon Read analyst Andrew Roskill said cut his fiscal fourth-quarter estimate on Oracle to 30 cents a share from 32 cents. The analyst, who rates Oracle's stock at hold, reduced his fiscal 2000 earnings view to 92 cents a share from $1. Oracle's fiscal fourth quarter ends May 31. Meanwhile, Prudential Securities raised its rating on the stock to "strong buy" from "accumulate."
Healtheon surged 10, or 21%, to 57 on Nasdaq. Healtheon is close to buying the Internet health-care-information company WebMD, say market sources familiar with the situation. WebMD had been planning a $55 million initial public offering but pulled the IPO, saying its business plan no longer involves selling shares to the public (see article).
Go2Net rose 2 1/8 to 127 3/16 on Nasdaq. The Internet hub, which operates Silicon Investor and other sites, acquired IQC.com for about $20 million in stock. Go2Net said the deal will bring the company a suite of free and subscription-based financial analysis and real-time charting services, which it will integrate with Silicon Investor.
Tricord Systems rose 23/32, or 30%, to 3 1/8 on Nasdaq. One of its investors, Compaq co-founder Rod Canion, will join Chairman and Chief Executive John Mitcham in the newly created office of the chief executive. The company said Mr. Canion will assist the company as it accelerates development and marketing efforts to introduce new products into the storage arena. Mr. Canion had been consulting for the company for several months. Tricord develops storage technologies.
3Com gained 2, or 7.5%, to 28 9/16 on Nasdaq. Business Week reported that Mike Murphy of the California Technology Stock Letter thinks 3Com will be taken over at 40 or 50 a share before the end of the year. Mr. Murphy thinks 3Com is a steal, with its price-earnings ratio of 25. Rumored suitors include Telefon AB L.M. Ericsson and Lucent Technologies.
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