Web Firms See Stocks Drop
Into Bear-Market Territory
By SUSAN PULLIAM and TERZAH EWING
Staff Reporters of THE WALL STREET JOURNAL
The numbers are grim: Shares of Yahoo!, down 43.5% through Monday from their high for the year. Amazon.com, down 46.9%. Ameritrade Holding, down 50%. America Online, down 31.9%. Inktomi, down 35% and Priceline.com, down 24%.
The biggest bubbles seem to be bursting.
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While most Internet stocks have posted healthy gains for the year, practically all of the major companies have seen their shares fall precipitously from their peaks -- capped by the sector's nearly 8% rout Monday. As a result, some market watchers conclude that the Internet stocks -- at least for now -- have entered a bear market, with all of the major indexes off more than 20% from their peaks (the rule-of-thumb definition for a bear market).
"I think the air is coming out of the bubble," said Morgan Stanley strategist Barton Biggs. "It hasn't been a free fall. But when the companies report good news and the stocks still go down, you know something is wrong." The Dow Jones Internet Index, after its 7.96% fall Monday, is now down 26.1% from its April 13 peak, though still up 50.4% for the year.
Water Torture
Internet stocks have taken big drops before. One came only a little more than a month ago -- shortly after the group's peak -- when Internet shares took a swoon of nearly 20% in one day as measured by the Dow Jones Internet Index, before staging a temporary comeback. What's different about this drop, however, has been its water-torture quality, analysts said.
"This has been a long, slow decline relative to other pullbacks," said Henry Blodget, Merrill Lynch's Internet analyst. "In that environment, you have a lot of people really losing money. They get in thinking it's the bottom and then they end up losing even more money."
There are other signs, as well, that the outlook is cloudy. While the initial public stock offerings of some Internet companies continue to skyrocket on their first day of trading, more are falling back to earth -- and faster -- than the earlier Internet IPOs.
TheStreet.com, which went public two weeks ago and nearly tripled from its offering price on its first day, ended Monday on the Nasdaq Stock Market at $33, down nearly 50% from its first-day close of $60 and even more from its high of $71.25 during the first day of trading. Shares of eToys, last week's highest-profile deal, quadrupled on its first day of trading Thursday, hitting $85 before closing at $76.5625 on Nasdaq, up from its offering price of $20. But since then, the shares have slipped noticeably, ending Monday at $57.
"Up until recently we have noticed strong after-market returns for Internet shares," says Linda Killian, co-manager of Renaissance Capital's IPO Plus Aftermarket fund. "It was only in late April and early May that the after-market returns actually turned negative for the sector, whereas returns are still positive for the non-Internet sector."
Moreover, a handful of Internet IPOs even are sputtering upon liftoff, rising modestly at best. Take last week's debut of CAIS Internet, which provides access to the Internet. On its first day Thursday, the shares rose just 16% from their offering price of $19 a share. Monday, the shares took a 21% hit, closing at $15 on Nasdaq.
What's going on? For starters, inflationary fears have taken the froth out of the market as a whole, with the Dow Jones Industrial Average down 4.07% from its peak on May 13 and the Nasdaq Composite Index, with its heavier technology-stock component, down 7.48% from its April 26 peak.
But the sell-off of Internet stocks has been much more severe. Why? While the whole sector has long-term promise as a business, most of these got wildly overpriced, given their losses and still-limited revenues in most cases.
Indeed, in retrospect, the first two weeks in April are now beginning to look like a turning point for the Internet group. That was when Yahoo, for instance, reported strong first-quarter results on April 7 but investors punished the stock anyway. It also helped turn some investors negative on Internet stocks when Amazon followed Yahoo's results with its own, including revenue figures that weren't as impressive as some investors had hoped for.
Downhill for the Big Ones
Since then, it has been downhill for many Internet biggies, not including what some investors are now referring to as a "false rally" toward the end of April when Amazon hit a new high of 221 1/4 and Yahoo rallied above 187. Likewise, AOL flirted with its high of 175 around the end of April.
That rally only served to draw more investors into those stocks, however, said Mr. Blodget. And the pain now for investors could be even worse as a result, he said. "I think that the reason the stocks are going down is not that there are more sellers but because there are fewer buyers. When people get their hands burned, they don't want to stick their hands in the fire again," he said.
Lately, there hasn't been much good news to cheer Internet investors on either. Last week, for instance, in addition to interest-rate worries, Internet fans had to digest the news that Internet traffic may be slowing somewhat. And if interest rates do go up, it puts a crimp in the model that some analysts use to figure out the future value of Internet companies.
Glut of IPOs
Just as important, a glut of IPOs and secondary offerings has led to a huge increase in supply. Whereas before there were lots of investors chasing few shares, there now are more shares being chased by fewer investors. One sign of the increased supply: The number of Internet IPOs has increased to 22 so far this month from 15 in April, 13 in March, nine in February and just three in January, according to CommScan LLC, which tracks public offerings. In addition, a number of Internet companies have come back to the market with secondary follow-up offerings far faster than IPOs in other industries, adding to the Internet shares available for public trading.
Scott Siprelle, co-founder of Midtown Research, which specializes in IPOs, said from now on, "There will be more I.Q. involved in buying these stocks. It's not going to be hot and cold. It's going to be high-quality business models and low-quality business models."
He added that, in his opinion, the impact of a bear market for Internet stocks has only begun to be felt in the IPO market. "I don't think we've even tested it yet," he said. "When you see a major Internet IPO trade below its issue price on the first day, that will be a major gong going off," he said.
Time Will Tell
Only time will tell what that bodes for this week's big IPOs. Monday, it was business-as-usual for them as barnesandnoble.com, the Web-based branch of the big bookseller, raised the price range of its IPO, expected to start trading Tuesday, to $16 to $18 from $11 to $13. Late Monday, officials at Goldman Sachs, barnesandnoble.com's underwriter, priced the shares at $18 each. Both the increase in the range and the fact that the deal priced at the high end of the range indicate strong demand.
But there are numerous other deals due out, including high-profile firms like online broker DLJdirect and Latin American Internet firm StarMedia Network and more-obscure names like Interliant, an Internet-services firm, and Juno Online Services, an Internet-service provider.
If history is any guide, continued woes in the overall sector won't be good for any of this week's new issues. "IPOs in general have always been sensitive to industry movements," says Jay Ritter, a finance professor at the University of Florida. "The Internet stocks seem to be extreme in this dimension just like they are extreme in other ways."
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