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To: Wyätt Gwyön who wrote (2649)	8/28/2000 8:06:03 AM
From: pat mudge	Respond to of 3951

August 27, 2000 Investors Coming Late to Internet Boom Should Buy Leaders in Every Sector By SUSAN PULLIAM and DAVE PETTIT Staff Reporters of THE WALL STREET JOURNAL Henry Blodget is one of a handful of Wall Street analysts whose stock recommendations have a big impact on Internet stocks. His influence was secured nearly two years ago when he predicted Amazon.com, then trading at around $240, would climb to $400 a share. Wall Street was incredulous, but within a month the stock reached his target and eventually hit $600. Since then Amazon and much of the rest of the Internet sector have returned to Earth. Join a live online discussion with Henry Blodget at 8 p.m. EDT on Monday. Mr. Blodget received more attention when he downgraded investment ratings on 11 Internet stocks earlier this month -- after many of them had suffered huge losses. The Wall Street Journal Sunday spoke with Mr. Blodget at his Merrill Lynch & Co. office about the outlook and opportunities for Internet-sector investors. Here are excerpts from that interview: Q: Has the Internet bubble burst for good, or has it just lost a lot of air? A: The bubble has burst for the consumer e-commerce sector. The extremely euphoric period that we went through, where stocks were going up and down 20% a day and you had both the stocks of good companies and bad companies appreciating at wild rates, I think that is over. But I still think the Internet is causing an enormous amount of change throughout the economy and if you look at certain sectors, such as fiber optics, there is still tremendous growth and the stocks still have extraordinary valuations. Business-to-business is another area where you still have extraordinary valuations. Q: What sectors within the Internet industry have the best prospects? A: The area that is still growing the fastest of all is infrastructure. That is both hardware -- and specifically fiber optics and switches and so forth -- as well as software: companies like Inktomi and, in business-to-business, Ariba. These companies are still growing extremely quickly and probably will continue to. In the consumer e-commerce and media sector, there will be a few survivors and our hope is that these will be big long-term stocks. But my guess is that we will have a period of a year or so here where they just sort of consolidate and the companies catch up with the stock valuations. Q: How many Internet upstarts are likely to fail? A: The industry itself is still growing at a rapid rate. But if you look at the number of companies, for example in consumer, five years ago we had one company, America Online. At the end of the first quarter of this year we had over 400. What you will see happen is that 400 will probably go to 25 to 50, of which a relatively select few will capture the majority of the profit. But the industry as a whole will continue to grow. It is just that there are too many companies fighting for the same pie. Q: Of the stocks that have been beaten down, are there any that you think people should consider buying at this point, or is it still just too risky? A: A company like Yahoo! makes a good investment, and a company like AOL makes a good investment. They haven't been beaten down anywhere near as much as some of the others, but they are profitable, they are capturing the majority of the value in the industry and the long-term growth prospects are still great. If you are a little more risk tolerant, Amazon is the leader at what they do and e-commerce is real. We think ultimately they'll figure it out. Q: What about someone who is looking to bottom-fish? A: A company like EarthWeb. They are executing well -- they are not profitable yet so that remains a risk -- but the stock has gone from something like $80 to $10 and that is an attractive valuation. Also, you can certainly look at companies like eBay and DoubleClick and Priceline.com. Until you see really clear evidence that a company is either profitable or about to be profitable and they are still having strong revenue growth, no stock is cheap because if they are going to run out of cash the stock obviously could go to zero. Q: What should people do if they missed out on the bubble in Internet stocks and want to get involved now? A: You want to concentrate on the leaders in every sector. But you have to believe that the three key drivers of the consumer sector are still in place: the number of people online, advertising and commerce. You can look at companies like AOL and Yahoo. A smaller one you look at, in the real-estate sector, is a company like HomeStore, which is aggregating real-estate listings and is trying to be sort of a portal for the real-estate industry. Q: What may be next big thing? A: Right now it is fiber optics and photonics [products that manipulate light for fiber-optic communications]. Going forward, you can keep looking for infrastructure areas and there are second-generation consumer companies that will be coming out eventually. It is almost better to go back and look at some of the areas that have really been crushed and where the sentiment is terrible. I think that is where a lot of the opportunities will be. Q: Are mutual funds a good way to invest in the sector? A: The advantage that mutual funds will give you is that they are diversified enough that they aren't going to concentrate the assets just in pure-play Internet companies. They will be able to take a very broad spectrum. And they'll be able to get in on the initial public offerings, which you can't as an individual investor in a lot of cases. So I think that is a very good way to play it. It is very diversified and things change so fast in this sector that if you aren't willing to do it full time you'll miss obviously a lot of upside and downside. Q: What is the biggest threat to Internet stocks? A: Valuation. It is easy to look at the sector now and say, 'Oh, it is down 70%, or in some cases 50%, and it is so cheap.' But unfortunately it is not cheap on [an earnings] multiple basis. We've been carrying some unbelievably high multiples for a long time. Q: How would Internet stocks fare in a recession? A: These are super-high-multiple stocks and historically those stocks tend to do very badly when you have significant interest-rate increases. The theory behind that is effectively you are discounting 10 to 20 years' worth of profit from these companies and if you change the rate at which you are discounting it a little bit, it makes a big change in the current value.