HB, interesting article on interest rates and flush internet companies.
NetTrends: Interest rates and Internet fever
By Dick Satran
SAN FRANCISCO, , June 8 (Reuters) - If the Fed had been around to hike interest rates in the middle of the Sierra gold rush, would that have caused the '49ers to down shovels and picks?
Of course not. But on the 150th anniversary of California's first big boom, investors are weighing the impact of rates on another gold rush. Internet stocks have fallen into their most sustained decline after two years of virtually unchecked gains, and at the same time interest rates have risen.
That, in turn, has sparked a debate. Will the Internet stocks forever be tagged as interest rate wimps, or will they win back their appeal as the giants of the new economy, able to build huge financial fortresses without bricks and mortar.
For now, the interest rate bears have a case.
The numbers are compelling -- and Wall Street loves numbers. Since the Fed started talking tougher on rates at the end of April, short-term rates have jumped 8 percent, and the American Stock Exchanges Internet index is down nearly 20 percent. Some big names, like Yahoo! Inc. and Amazon.com Inc. have lost half their value. Meanwhile, broader indicators like the Standard & Poors 500 have shifted just a few percentage points.
''In general, the recent rise in interest rates has spared most stocks -- but the Internet stocks have been hit hard,'' said A.C. Moore of Dunvegan Securities.
Charlie Crane of Key Asset Management, explains that, ''The rise of interest rates has a disproportionate impact on these companies because of their high valuations.''
But backers of Internet stocks haven't melted down their picks and shovels for scrap value yet -- far from it. Many say the interest rate trend is mere coincidence, and the lofty stock prices let them fund growth without interest-rate borrowings. Also, their pricey stock offerings have filled their bank accounts to overflow, so one of the biggest items on their earnings statements is investment income.
''Given how much cash each of these companies have, the best thing for them is rising interest rates because it will inflate my earnings estimates,'' analyst Keith Benjamin of BancBoston Robertson Stephens said in a Reuters interview in London.
Benjamin said many Internet companies are highly cash generative and will see higher interest income as bond yields rise. He cited American Online's $2 billion in cash and Internt name company Network Solutions Inc.'s $200 million.
''I have zero confidence in all of this talk about Internet stocks being susceptible to interest rates,'' said David Menlow, of IPO Financial Network. ''Their stock is like a currency for acquisitions. They don't need to borrow to do it.''
Menlow sees the recent downturn in the stocks, instead, linked to another factor -- a dramatically increased flow of initial public offerings hitting the market and siphoning off funds from investors. That has capped the value of the stocks after they've more than doubled over the past last year.
But the Internet rate argument, he said, ''is absurd.'' He notes that stocks have generally risen the past two years -- and soared last October -- with no perceptible shift in rates.
''From my perspective,'' said Monument Internet Fund manager Alex Cheung, ''Internet stocks are not more or less sensitive to rates than any other group.''
As growth stocks, they tend to be a bit more volatile on a day-to-day basis than others, he said, and they could be more likely to make short-term swings on rate fears, or other factors. But in the longer term Cheung expects them to outperform, partly because they can to expand with a lower cost of capital than their counterparts in heavy industry.
''The underlying growth of the sector is so high, any return on investment projects is going to far outweigh any impact of interest rates -- much more than in other industries,'' said Cheung.
Silicon Valley's venture capital community apparently shares that view, since Internet-related funds have swelled to record levels, from $2 billion in 1990 to $15 billion now, and nearly all of that money is headed to the Internet.
''The Internet isn't overhyped, it's underhyped -- it's the whole economy, going forward,'' said Steve Jurvetson, of the investment firm Draper Fisher Jurvetson, and one of the ''hot hands'' in the venture capital world.
One of the enduring appeals of Internet companies is that they don't consume much capital, he argued at a Stanford University conference last week.
Hotmail, one of his most successful investments, won 12 million members in two years, mostly through its own free e-mail messages that said ''Get your free e-mail from Hotmail.'' That's the kind of low-cost ''viral marketing'' venture capitalists like -- and the thing the Internet was supposed to be good at.
''You know how much Hotmail spent on advertising before it was taken over by Microsoft (for $400 million)?'' Jurvetson asked the conference. ''They spent $50,000.''
Recently, the best known Internet companies have been pouring tens of millions of dollars into brand-name advertising and billions more into buying competitors. So far, they've managed that by using their own stocks as currency -- not real money. But if they lose sight of their roots and start acting like corporate giants starved for capital, the interest rate tag might well fit.
''There's no problem getting capital now,'' Jurvetson said. ''But if there is a dearth of capital in the future, then it's the ones that get by without it that will survive.'' |
