Heard on the Street, 3/11/98
By Susan Pulliam
Staff Reporter of The Wall Street Journal
If a personal-computer price war is about to break out, which groups of stocks will be left standing when the shooting stops?
Wall Street is busy laying bets on where the casualties will be highest since last week's blitz of bad news in the technology sector, first from Intel, then from Motorola and Compaq Computer, each of which said the first quarter would disappoint and pointed to slow demand. That, investors have decided, will lead to an inevitable price war as Compaq, in particular, begins slashing prices to move out old inventory from the pipeline.
But surprisingly, some of the heaviest betting has been in stocks other than the mammoth personal-computer stocks themselves, though they too are down substantially. Some of the biggest movers have been the Internet-company stocks, which are seen as major beneficiaries of a potential price war. Yahoo!, one of the big Internet access providers, is up about 22% since Intel's profit warning late last Wednesday. On Monday, Internet stocks were up on average 10%, with Amazon.com up 6 3/4 to close at 83 1/2, for instance.
Why would a price war be good for Internet stocks? The thinking is that lower PC prices will ultimately lead to more sales of computers, as price-conscious consumers are drawn in by lower price tags. But some smart hedge-fund traders are betting that logic won't hold up, and that Internet stocks are due for a fall.
Ultimately, Internet bulls argue, the price gouging will lead to more surfers on the Web and a greater need for services, such as access providers like America Online. Indeed, AOL is up 8.8% since the announcement, while shares of Internet service providers have also spiked. Amazon.com, which sells books over the Internet, has gained 13.2% since Intel's news hit the wires. Onsale, which sells computer equipment over the net, is up 27%.
"The buildup of personal-computer inventory will lead to price cuts, driving more machines into the market," says David Readerman, an Internet analyst for NationsBanc Montgomery Securities. "The more machines that are out there, the more demand there will be for software," he adds, saying he expects beneficiaries to include America Online, Preview Travel, which is an on-line ticketing service, Onsale, Yahoo! and Amazon.com.
But the news may not be as great for Internet stocks as Monday's instant analysis from some on Wall Street would suggest. Indeed, many investors suggest that much of the buying has been among individual investors who are being touted the stocks by retail brokers.
Lots of hedge-fund managers say they are lining up to sell shares of Internet stocks short, betting on a decline in their price, because of the stratospheric valuations they have taken on lately. Not everyone buys the idea that Internet companies benefit from a price war. One hedge-fund manager says, "It's like saying General Motors and Chrysler are running promotions, so billboard advertisers will do better. It doesn't make any sense."
Mark Usem, an Internet analyst at Salomon Smith Barney, says: "These companies have little liquidity. They're very volatile, and so if a few managers put money there, it can drive the stock up wildly." What that also means, he says, is that the stocks could plummet just as easily as they have taken off in recent days. "We think the stocks have gotten ahead of themselves. And people are not buying these stocks for their fundamentals," Mr. Usem says.
Valuations are lofty indeed. Edward Petner, president of Lynch & Mayer, says: "Yahoo! is the most expensive stock I have ever seen." The Internet search company trades at an almost unheard-of 54 times its revenue for the past four reported quarters, he says, when a more normal level for a growth stock is 10 times trailing revenue.
(END) DOW JONES NEWS 03-11-98
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