Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : Amazon.com, Inc. (AMZN) -- Ignore unavailable to you. Want to Upgrade?

To: Grandk who wrote (72938)	8/10/1999 2:05:00 PM
From: Eric Wells	Respond to of 164684

J Kenyon - thank you for your post, and your clarification on the rationale behind your predictions. I believe that there is some likelihood that net stocks will not rebound until they generate enough profits to justify their market valuations based on what might be considered reasonable PE ratios (from a historic perspective) - whether this will happen in two months or two years - well, I'm inclined toward the latter. I believe that there are a number of reasons why internet stocks have reached stratospheric valuations over the past two years - I've written on these reasons in detail on this thread over the past two months. Rather than bore people by repeating the same detail, I'll just summarize some of my reasons here: 1. Investors have had overly optimistic expectations about the internet's impact in an unknown future. 2. Online investing has opened the market up to more investors, and more people willing to buy these stocks, thereby propping up their value. 3. Greed, and a fear of "missing out" has driven investors to buy these stocks - we've seen others make millions on YHOO and AMZN, and we need to do the same. 4. Investment banks have taken advantage of investor mania - buy reiterating favorable ratings on these stocks to prop up their values while bringing out more and more IPOs. 5. Some investors suffer from an "I can do it again" mentality, where perhaps they made a lot of money on net stocks last year, and they are convinced that it is bound to happen again this year. 6. And then there are a lot of economic factors over the past two years, such as a strong dollar and low interest rates, that have resulted in money flowing into the US (ask GST about this) - this money seems to be flowing out of the US now, as the dollar becomes weaker and interest rates rise. 7. Some net stocks have shown some impressive rates of revenue growth. Of all the reasons above, only the last, number 7, comes close to providing a fundamental justification for a high market valuation. But many net companies that have seen high revenue growth are experiencing enormous losses. Why? Because doing business on the internet is very price competitive, which equates to low profit margins. And because of extremely low customer switching costs (the cost that a customer must pay in switching from doing business with you to doing business with a competitor), internet companies must spend a lot of money on marketing and advertising in order to build brands and to try to conjure up ways to keep customers coming back to their sites. Of course, we don't know if a strong brand will necessarily keep a customer from buying from a competitor, especially if the competitor is offering the same product at a lower price. I think the internet stock mania we've seen over the past two years is very similar to other historical manias - take your pick: Tulip bubble, South Sea bubble, Gold Rush, Silver Rush, 1800s Railroad speculation, etc., etc. Some people made fortunes off these bubbles - but their numbers are much fewer than the masses of investors that lost their shirts. You may be right, the net stocks may bounce back in the short term. I hope they don't - because if they don't, it will go a long way toward re-establishing my faith in our markets and our economy, and will rid me of the impression that our markets have become too much like casinos of late. Thanks, -Eric Wells