No one has forgot, are you short?? From Wsj Heard on Street
March 11, 1998
Heard on the Street
Internet Stocks Surf on Fears
A PC Pricing War Will Erupt
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, 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.*****{INFOSEEK-TOO}*****
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 engine 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.
The sting from the bad news in technology land, outside of the behemoth
technology names themselves, has also been felt by computer hardware
makers and distributors, both of which are considered to be at risk of falling
profits as the PC makers push through lower prices.
"The channel guys [distributors] are going to have to digest the inventory
bulge, and some will undoubtedly get squeezed," Mr. Petner says. Tech Data,
for instance, is down 11% since last Wednesday on worries about its ability to
weather coming cuts from Compaq.
Not everyone buys that theory, either. Steven Fortuna, an analyst with
Deutsche Morgan Grenfell, says he believes the "channel guys" will coast
through without getting nicked.
Distributors, he points out, generally receive price protection from the PC
makers, he says, so that a cut in prices may not hurt them. But he adds that
some of the price protection can come in the form of rebates on advertising
costs or other "soft dollar" payments from PC makers. Those sorts of rebates
would not necessarily preserve gross margins for the distributors, he says.
Alex. Brown downgraded distributor Ingram Micro to "buy" in the aftermath
of last week's developments. Corporate demand may have "dimmed," said the
analyst, Christopher Feiss, and that could put a cap on Ingram's earnings
gains.
The picture could get worse yet, Mr. Feiss added in a note to clients. "Massive
anticipated price reductions could delay corporate purchases further still,
creating an additional downward bias for the entire PC channel," he said.
Contract manufacturers also took a hit in recent days, as investors concluded
that lower PC prices would translate into lower profits for outsourcing
companies such as Jabil Circuit, which makes electronic circuit board
assemblies for Gateway 2000, among others. Jabil shares are down about 15%
since last Wednesday, though Tuesday they recovered somewhat, gaining 2
1/16 to 41 1/32.
www.rally
An intensified price war in personal computers, signaled by recent
announcements by Intel and Compaq, has fueled a surge in Internet stocks.
Company
% Change
Since 3/4
Yahoo!
+22.2%
Infoseek
+17.5
Excite
+14.8
Amazon.com
+13.2
America Online
+ 8.8
Earthlink Network
+ 8.2
N2K
+ 6.6
Lycos
+ 6.0
*****= my own addition
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