Old 1999 article on valuation
mercurycenter.com
Posted at 2:19 a.m. PST Saturday, January 23, 1999
Internet Stocks Falter, Causing Wider Worries
By EDWARD WYATT and DAVID BARBOZA
New York Times
George Nichols, a 22-year-old management major at the Georgia Institute of Technology, put more than $1,500 of his student loan money in a mutual fund investing exclusively in high-flying Internet stocks.
Shalin Madan, 23, left his job as an accountant at State Street Bank in San Francisco to become a full-time "day trader,'' moving his money frantically in and out of stocks like America Online, Amazon.com and Yahoo, often every few minutes.
Jill McKinney, a 27-year-old employee of Silicon Investor, an Internet site devoted to technology stocks, recently got b>an excited recommendation from a taxi driver in eattle to invest in Broadcast.com.
As such delirium has spread, Internet stocks have soared.
Shares of newly public companies like Marketwatch.com and theglobe.com have risen threefold or fourfold in a day; more established companies like Yahoo or Amazon.com have more than doubled in the last three months. Marketwatch.com now sports a market value of nearly $950 million -- bigger than such established companies as Reebok, Polaroid and Tupperware.
But this week, a bit of the air leaked out of what many all Street pros call the Internet bubble, with some high fliers, like Amazon and America Online, falling sharply from recent highs. And while most of the stocks are still ahead for the year, many analysts are warning of a steep decline that could rattle the wider market.
That is because Internet fever has spread in recent months to technology companies and an even broader swath of the market. And it leaves investors in 401(k) plans and mutual funds who have not bought into companies with dot.com after their names increasingly vulnerable.
The latest warning about an Internet selloff comes from Barton Biggs, a Morgan Stanley strategist who has been bearish on the market for some time. ``I promise you, like all bubbles, this bubble will come to a very bad end,'' he
said Thursday.
If it does, it is not just Amazon and Broadcast that will
suffer. Pension and fund managers who are worried about the high prices of Internet stocks or who are having trouble buying large stakes in these small companies have driven up the stock prices of companies like Cisco Systems, of San Jose, which builds equipment that connects computers to the Internet, and Oracle, of Redwood Shores, whose database software is used by many online retailers.
Even more cautious fund managers have turned to companies like Walt Disney, CBS and Sotheby's that have only the most tangential connections to the Internet.
When Disney unveiled its Internet joint venture with Sunnyvale-based Infoseek Corp., Go Network, earlier this
month, investors bid up Disney's market value by $5.6 billion.
While valuations of Internet stocks remain in the stratosphere, those of technology stocks have doubled in
the last three months. And those of broad market indicators like the Standard & Poor's 500-stock index have leaped by 50 percent.
The prices of Internet stocks have risen so high so fast
that even analysts enthusiastic about the Internet's long-term effect on the economy have warned that prices in the entire sector are likely to fall more than 50 percent.
A sharp, widespread decline would cause headaches for regulators and could cause problems for many online
investors, who dominate the trading in many Internet
stocks. Already, a group of senior officials from several
big Nasdaq trading firms has met to discuss recent
volatility among the Internet stocks, virtually all of
which trade on the Nasdaq stock market.
Several brokerage firms have acted to squelch speculative
trading by restricting online transactions. Among other
things, they have made it more difficult to borrow to
buy Internet stocks and put certain limitations on initial
public offerings.
But all this has done little to damp the enthusiasm of investors like Madan, whose passion is simply an extension of a love of all things digital.
``It's a gold mine,'' Madan said. ``The Internet stocks
are the epitome of the `90s. They're a reflection of what
is going on in the stock market. It's just more extreme.''
Last week's initial public offering of Marketwatch.com,
which provides financial data to Internet sites, was
one of the hottest ever. The shares were initially offered to select investors at $17, but public trading opened on Jan. 15 at $90. The stock finished the first day at $97.50 but has since fallen to $80.50. That means most investors who bought after trading began have suffered losses, as
have recent arrivals to most Internet stocks.
Like Marketwatch, nearly every Internet company sports
an outsized valuation. America Online is worth more
than half the companies in the Dow Jones industrial average.
Yahoo, of Santa Clara, is valued higher than Eastman Kodak. And the market value of Amazon.com exceeds the combined value of Barnes & Noble, Nordstrom and Federated Department Stores.
Richard Hoey, chief economist at Dreyfus Corp., recalls
that a similar frenzy for computer stocks emerged in
the summer of 1983, about the time the personal computer
was introduced. But few of the favorites then -- like
Prime Computer and Coleco -- are around today.
`The enthusiasm over the growth of technology as an
industry was very well founded,'' Hoey said. ``But we
learned that today's hot stock is not necessarily a
long-term winner.''
Judging by market values, though, few Internet stock
prices reflect the possibility of failure. Other
internet companies have the same huge multiples. Yahoo is worth $35 million per employee, and eBay, a San Jose-based
Internet auction site, $61 million. That compares with
$14 million at Microsoft and $5 million at Coca-Cola.
And while companies like Coca-Cola, Microsoft and
Infinity earn millions of dollars each quarter, most
Internet companies are years away from profits.
Even some who are certain the Internet will bring about
fundamental changes in the economy say there is no
sense to the huge valuations.
``The Internet is making huge changes in how we live
our daily lives,'' said Lise Buyer, an analyst who follows
Internet companies at Credit Suisse First Boston. ``But
there is no way to correlate what is happening with
these stocks to the underlying businesses. What we have is a mania.''
Internet stocks shifted into overdrive on Dec. 16, when
a little-known Wall Street analyst, Henry Blodget,
stirred investors' speculative juices with a seemingly
outrageous prediction.
Blodget, a 32-year-old financial analyst at CIBC Oppenheimer, forecast that Amazon.com, whose shares
were then trading for $242, would reach $400 in 12
months. They surpassed that level in early January, and
the stock split.
Even though Amazon shares have since fallen, they are
up 52 percent since Blodget's report when adjusted for
the split. But he, too, says Internet stocks are ahead
of themselves.
``I don't think there's a sector in history that's been
valued at these heights,'' he said. ``It's totally
frightening.''
Blodget said part of the reason for the rapid climb is
that there are only about four dozen ``pure play'' Internet
stocks, and fewer than 10 of those have moved much
beyond the planning stage.
Among the most promising are those like Yahoo, which
operates an entry site, or ``portal,'' to the Internet.
Investors hope that the services offered by portal
companies, like free e-mail and connections to shopping
sites, inspire loyalty among users, which the companies
can capitalize on by selling advertising.
Other big favorites are online shopping sites like
Amazon.com, which, although unprofitable so far, hopes
to capture customer loyalty as it expands.
Because many young companies have relatively few
shares outstanding, big investors like pension and
mutual funds have found it hard to buy large stakes without
significantly moving share prices.
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And sitting out 1999 would have meant watching it all go by.
Jack |
