** Nothin' but Net **: This one is for you Marc:
Dazed Net Stock Owners Ask, How Low Can They Go? Investing: Severe decline
calls into question assumptions about young companies' worth. 'You think, "There
goes my down payment," ' says one executive.
By JOSEPH MENN, Times Staff Writer
SAN FRANCISCO--Three weeks of devastating losses have demoralized even
some of the hardiest players in the Internet stock arena--from share-option-laden
Silicon Valley workers to Middle American day traders to veteran Wall Street
money managers.
With that backdrop, this week may bring the biggest test yet for the Net stocks
mania that has kept investors transfixed for much of the last year. Although
Internet investors are accustomed to volatility, the latest decline in many of the
stocks has been the longest and deepest in their young histories.
The Interactive Week index of 49 Net-related shares has plunged 19% in three
weeks, with only feeble rally attempts interspersed. The index is off nearly 27%
from its record high reached April 26.
For many individual stocks, the damage has been much worse, with plenty off
50% to 70% from their 1999 peaks. The worst-hit include the industry's leaders,
such as Amazon.com, EBay and America Online.
And last week, new stock offerings by companies such as Net florist
1-800-Flowers.com and Internet Gold, Israel's leading Net service provider, fell
below their initial offering prices--a disaster for the companies, their investors and
the stocks' underwriters.
The wealth destruction--albeit on paper--has been enormous, just as
the buildup of wealth in these stocks since spring 1998 had been
enormous. "You think, 'There goes my down payment,' " said Krista Thomas of
Inernet holding company CMGI Inc., which owns pieces of e-mail provider
Critical Path and online marketer Engage Technologies.
In front of computers and TVs across the country last week, professional and
novice investors alike watched their screens as they would car wrecks.
At a San Francisco investment conference, money manager Langwith
Manion kept checking a stock chart of AOL. He pointed to where the stock's last
great slide had ended, at about $90 a share in June. This time, the stock fell
through that level, ending Friday at $84.75.At its peak in April, AOL fetched
$175.50 a share, valuing the companyat nearly $200 billion. The question that's
been asked about Net stocks many times over the last year--whether this is the
final burst of the bubble--is again topic A. But with more urgency.
"UNBELIEVABLE. I've never seen such carnage. EBay down 10% today," read
one posting to a Silicon Investor Internet message board last week. "By next
week, they'll all be penny stocks. I can't even 'ask Jeeves' anymore. He's
bankrupt," the poster wrote.
(Not exactly: Ask Jeeves, an Internet question-and-answer fact-finding service,
went public at $14 last month and bounded to $77.81 in a day. It's still a going
concern, though the stock is now at $30.50.)
Even among professionals, the fear is palpable. "You wonder if you're near the
end of it," said Manion, of Deutsche Banc Alex. Brown. Some experts say the issue
isn't investors' fascination with the Internet's long-run potential, but a problem of
oversupply: too many
stocks.
"We have taken too many companies public for the 'buy' side [investors] to
handle," said Keith Benjamin, senior Internet analyst at brokerage BancBoston
Robertson Stephens. "The buy side is broken." But underlying any conversation
about Net stocks is the basic issue of valuation. These stocks have been valued all
along at levels never afforded any other stocks.
Most of the companies still are unprofitable, but their biggest fans have argued
that the Internet's growth potential was so huge that new valuation rules were in
order. Most popular was the idea that the companies should be valued at a
multiple of their current annual sales, or potential sales. "Twenty times revenue
used to be socially acceptable" at the stocks'peaks, notes Walter Ruane, who
invests money at General Electric's GE Investments.
With the steep slide in share prices, the market appears to be saying that the
20-times figure was excessive. Now, "does it go to 10 times? 15? There's no
telling," Ruane said. "We're in no-man's land"--especially with interest rates
rising, which tends to depress all stocks.
Bill Gurley of Benchmark Capital, an investment firm that funded EBay as a
start-up, said most Net stocks deserved to fall. Perhaps six times revenue for a
company such as Amazon.com would be a reasonable valuation floor, he said.
Based on expected 1999 sales, Amazon.com is still valued at 12 to
15 times revenue. And the problem with valuing companies by revenue, Gurley
said, is that a firm can build up revenue pretty quickly if it sells dollar bills for 95
cents--in other words, if it is willing to assume massive losses in the name of
boosting sales.
For Net company employees in Silicon Valley and elsewhere, the severe stock
declines of recent weeks have created "haves" and "have-nots" among the ranks
of those with stock options.
"People who have started in the last three or four months are under water,"
meaning their options are currently worthless, an Excite@Home employee said
last week. "But I'm shedding big crocodile tears--my stock is worth more than
three times what it was when I started." The destruction of paper wealth is being
felt in the economy.
At Stanford European, a Lamborghini and Ferrari dealership in Palo Alto, things
have slowed down a bit.
"People have come in and said, 'Let me come back in a couple of days, after I talk
to the wife,' and they don't come back," said sales manager Matt Coyle.
Lauren Cooks-Levitan, an Internet retailing analyst for BancBoston Robertson
Stephens, doesn't deny being nervous. She has "buy" recommendations on eight
stocks, including a "strong buy" on Amazon.com (now down 60% from its record
high), and "sell" recommendations on none. But, she added, "I'm paid to be
nervous." "A lot of the institutions realize they're navigating a brave new world"
and should have patience, Levitan said.
Still, the calls from big investors keep coming. "They're looking forinformation.
And they're looking for hand-holding."
Merrill Lynch analyst Henry Blodget, who made his name correctly predicting
Amazon.com's dramatic run-up earlier this year, sounded more downbeat last
week. He told a luncheon crowd that 75% of Internet start-ups would fail or be
bought out.
Still, Nancy Roset, a Sausalito venture capitalist with some of her
own money in Internet stocks, said she's holding on, believing that her stocks will
come back in six months or a year.
The reason for Roset's confidence, however, has little to do with the companies'
fundamentals. She's betting on the "greater fool" theory: That even as many
investors have been burned in Net stocks, there's another army of buyers out
there, at some point. "Investors will still overpay for these stocks."
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