Net Stocks Have Their
Seasons Too
Why has Net usage slipped
recently? Hey, normal human
beings like to spend some time
outdoors in spring and summer.
Bethany McLean
In recent months the action in the
Internet sector has provided a whole new
definition for the word "volatility." Since
their April highs, eBay, Amazon.com, Yahoo,
AOL, and E*Trade have combined losses of
almost $150 billion in market value. It used
to be that when Wall Street analysts set
sky-high price targets, Net stocks covered
half the distance in a single trading day.
Now the movement is just as likely to be
down. The euphoria is gone.
One reason for the ups and downs--as
investors have known for a while--is that
Internet companies are no more immune
than others to such old-fashioned factors
as rising interest rates, competition, and
oversupply. (So far this year some 134
dot.coms have gone public, raising almost
$12 billion, says Securities Data.) But a less
discussed issue has some stock watchers
equally concerned: Words like "seasonality"
have begun creeping into the Internet
vocabulary. Seasonality, says Bob Turner,
chief investment officer of Turner
Investment Partners, "has had as much of
an impact on these stocks as the rise in
rates."
While the first cracks in the virtual world
began to appear in the spring, concern
about seasonality started in the early
summer, when data from Media Metrix
showed that the number of unique visitors
to AOL and Amazon had dropped in April.
Then these companies reported
second-quarter revenue growth that was
not as thrilling as that of the first quarter.
(For example, AOL's revenue for the period
increased just 10%, vs. a first-quarter gain
of 30%.) On top of that, in early August,
Greenfield Online, an Internet market
research firm, said that the percentage of
people with Net access who make
purchases from Websites declined slightly in
the second quarter, from 74% to 71%. A
report by online brokerage analyst Bill
Burnham of CSFB set off a furor when he
predicted that upcoming July data would
show that online trading volume grew only
slightly that month and could actually
decline in the third quarter. And iVillage CEO
Candice Carpenter actually used the "S"
word, talking on CNBC about a "seasonal
slowdown" in her business.
None of this is all that shocking. It's
perfectly reasonable that normal human
beings would spend more time outdoors in
spring and summer and less time hunched
over their computers, whether to buy
something online or to trade stocks. And
compared with offline retail's 4% annual
growth, Amazon's 7% revenue growth in
the second quarter alone looks pretty
astounding. Exclaims James McQuivey, a
senior analyst at Forrester Research: "Even
if there is a summer slowdown, these
businesses are still growing faster than any
other industry!" For that matter, McQuivey
says Greenfield's numbers actually indicate
that once all those offline folks get online,
an incredible 70% of them will buy
something. So are the worriers
overreacting? "You cannot make one or two
months' numbers into a trend," says
Alexander Cheung, manager of the
Monument Internet fund.
But the worriers may have a point. Usually,
when a new industry is born, the growth is
so dramatic for such a long time that it
masks seasonal variations due to, say,
summer vacations or holiday shopping. But
"Net stocks have grown so fast that
they've developed cyclicality faster than
the typical new industry," says Matt Rich, a
partner at hedge fund Kauser Capital. And
that fast development is ripping off their
mask prematurely.
Cynics also say the slowdown may mean
that some online markets aren't potentially
so big as everyone thinks. Says David
Brady, a portfolio manager at Stein Roe: "If
these markets were that huge, you would
think that so many people would be [going
online] that you wouldn't see any summer
slowdown yet."
One thing is certain. As CSFB's Burnham
puts it, "Internet businesses are just
real-world businesses in disguise." At
holiday times, for example, eToys shows
the same spike in sales as Toys "R" Us. And
as the growth of the Net slows, eToys'
growth may look more like the overall toy
industry's--in which case, investors may
not be willing to pay 100 times revenue for
a bricks-and-mortar growth rate. "The
single biggest factor driving these stocks is
the growth of the Net," says Burnham.
That's exactly why everyone is so nervous.
The Net is an entirely new phenomenon,
and despite the projections about the
number of people who will be online in a
decade, the fact is that no one really
knows. And even if everyone does do
everything over the Net someday, there will
still be fluctuations in growth along the
way. "It's not going to be a straight line
up," says Paul Cook, manager of the Munder
NetNet fund. The problem is that
maintaining a state of euphoria requires a
constant stream of ever-improving news.
But that's not how real-world--or
virtual--businesses work.
Issue date: September 6, 1999
Vol. 140, No. 5
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