Europe?s stockmarkets have caught Internet fever. And how!
AMERICA?S enthusiasm for all things high-tech is legendary: witness the $1 trillion market capitalisation?and rather generous valuations?of American Internet companies. Similarly, America?s contempt for Europe as old world and old economy is taken as read. But judging by its investors? new-found enthusiasm for high-tech, Europe is getting younger by the day. At the end of September last year, the market capitalisation of European Internet companies was about $25 billion. Thanks to some big new share offerings and a dramatic rise in share prices, it is now, reckons Morgan Stanley Dean Witter, almost $100 billion.
And, assuming the market does not fall to earth in the meantime, that number is about to get a lot bigger. On January 25th, Deutsche Telekom, Germany?s former telecoms monopoly, announced that it would float some 10% of T-Online, Europe?s largest Internet-service provider (ISP), this spring. Sensibly, Ron Sommer, Deutsche Telekom?s chief executive, refused to be drawn on the flotation share-price: that depends, after all, on how febrile the market is at the time.
Still, analysts guess that the sale will give T-Online a market capitalisation of up to euro40 billion ($40 billion), making it, by that measure, Europe?s biggest Internet company. Well, probably: Terra Networks, which was hived off from Spain?s former monopoly, Telefonica, late last year, has a market capitalisation of euro26 billion; its value rose by euro14 billion in the first 18 days of the year. Since going public, Terra?s shares have risen eightfold.
Europe, it is clear, has caught the dot.com bug. The London Stock Exchange?s techMARK, its new home for many a tech-share stock, and the Neuer Markt, Germany?s three-year-old, more successful market for similar stuff, have soared (see chart). There are now 208 shares listed on the Neuer Markt, with a new stock listed, on average, every other day. Some of them even make money. For example, at EM.TV, a television-rights and merchandising group, and ConSors, an online broker, profits, though small and recent, are growing strongly.
Not that it matters much: in the frenzied world of the Internet, many investors seem convinced that the bigger a new company?s losses, the bigger its potential. Take Gigabell, a diminutive Frankfurt-based media company. On January 24th it announced that its losses had risen 11-fold compared with 1998, despite a near-doubling in turnover. No matter: Gigabell explained that the losses were down to heavy investment and advertising. Its shares rose by 11.6%.
There are plenty of other examples. Britain?s Jellyworks, a firm that ?incubates? other Internet start-ups, listed its shares late last year. It has few investments, save a couple of other incubators. Yet its market capitalisation has swollen from œ10m ($16.4m) to œ220m. In France, Thomson Multimedia was once a dismal television maker that the government tried in vain to give away to South Korea?s Daewoo in 1996. It is now France?s 39th-largest company by market capitalisation on the back of possible Internet forays.
Having largely missed out on the Internet gold rush in America, European investors do not want to repeat the mistake. Hence their stampede into local Internet shares. And how: in the last quarter of last year, says Merrill Lynch, the three top performing European Internet stocks were GEO Interactive (up 958%), Tiscali (771%) and QXL.com (741%). There is, of course, the usual reasoning: Europe is rapidly going online. Forrester Research, a technology consultancy, estimates the number of European Internet-users almost doubled last year. Online business in Europe, it thinks, will be worth some $1.6 trillion by 2004. For investors the lesson is clear: get in quick and get rich.
But there are big (some might even say disturbing) differences from America. Europe is fragmented by, among other things, culture, language and regulation. Terra, being Spanish, has Latin America in which to expand; but in general, most Internet companies are decidedly domestic. T-Online might be a roaring success in Germany and Austria, but not elsewhere.
In addition, unlike in America, most of the biggest Internet companies are spin-offs from established firms. Besides T-Online and Terra Networks, Freeserve, the next biggest by market capitalisation, was set up by Dixon?s, a British retailer. Tin.it, a subsidiary of Telecom Italia, will be floated later this year. This has advantages: it gives fledging companies the backing of a known brand; but some wonder how Internet firms will fare if still controlled by stodgy founders.
The na‹ve might expect that Europe?s fragmented markets would mean lower valuations. Far from it. Europe, in valuation terms, is much newer (ie, breathtaking) even than America. Take Terra, for example. It is not, of course, profitable: in the six months to June 1999, the last figures available, it lost euro21m on revenue of euro8m. But even using new-economy valuation measures it looks a touch pricey: its market capitalisation implies that investors value its subscribers at $30,000 apiece. That is three times the value attached to those of America Online.
One reason for these startling valuations is simple: demand outstrips supply. Of the 85 or so listed Internet companies, most are tiddlers, which float only a small fraction of their shares. Even the handful of ?big? companies?Terra, Freeserve and Tiscali?have made only a tiny proportion of their shares freely available. Dixon?s still owns 80% of Freeserve, for example. The average ?free float? is 10-20%. Scarcity forces prices up. Even the expected deluge of Internet offerings this year is unlikely to satisfy demand and affect prices.
Or so optimists argue. Apparent scarcity was one reason why Japanese shares were bid up to silly levels (though not quite this silly) in the late 1980s. The odd thing is how many market professionals will admit in private that this frenzy too is a bubble. Some even say so in public. In a report this week, Merrill Lynch produced ten rules for Internet investing. The sixth (why so low?) was: ?Recognise that what looks like a bubble probably is: we think [the] valuation ?floor? is 75% below current levels?. How old world. How European.
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