Repost from the AMZN thread:
>> Caught in the Web<< the whole article ; this really sums it up nicely re: the hype and the lunacy of buying AMZN , etc.
Oh, man, what money they're going to make! If anything, that understates the opportunity that now looks to be shaping up for short-sellers in the unbelievably overpriced Internet sector of the stock market.
Here at "Back of the Envelope,"The entire sector looks poised for a vicious price-cutting fight for advertising dollars in a market where there aren't enough to go around as it is. we haven't been falling-over crazy about stocks like Yahoo! Inc. and Netscape Communications Corp. from the moment Wall Street's investment banks started pumping them out as initial public offerings two years ago. But we've sure looked pretty stupid this last year as the entire sector has erupted in tulip time hysterics that have pushed these stocks to valuation multiples not seen in portfolios since the wackiest days of the go-go 1960s. Yet in recent weeks, the situation has gotten so totally out of hand that one might almost say the frenzy has reached the blowout stage, as investors have driven these stocks right out of the earth's gravitational pull. That certainly seems to be where we find them now - free-floating in outer space at 60 and 70 times revenues, like some out-of-control probe mission from Wall Street in search of investors from other galaxies.
In such situations, it often takes only one bit of unexpected bad news to pop the bubble, and last week might just have produced that pinprick. It came by way of Netscape, the Mountain View, Calif., company that, in a sense, launched the whole Internet phenomenon in the first place. The party-pooping news came when Netscape announced the one thing that no Internet investor wanted to hear. In a desperate move to diversify out of its crumbling core "browser" business (more about that in a minute), Netscape unfurled plans to begin competing with the very companies it had helped spawn, from "search engine" stocks like Yahoo! and Excite Inc. to Internet "content providers" like CNet Inc. Most of these companies aren't making any money even without Netscape as a competitor. Now the entire sector looks poised for a vicious price-cutting fight for advertising dollars in a market where there aren't enough to go around as it is.
Netscape basically created the Internet market out of thin air by developing and mass marketing a software program called the Netscape Navigator "browser." If you're one of the few remaining people on earth who still don't get what a browser is, then this is all you need to know: It comes on a little Frisbeelike thing that you put in your computer so that you can "browse the Web." Back in 1994, Netscape started cranking out these Navigator-thingies by the zillions and giving them away free, and pretty soon everybody was "surfing the Web" like virtual Beach Boys, looking for "cool stuff" while having cybersex in chat rooms. What a life - especially for Netscape, which got Morgan Stanley & Co. and Hambrecht & Quist to take it public in August 1995 with a market capitalization of more than $2 billion on revenues of only $16.6 million and net losses of $4.3 million.
Unfortunately, not one of these companies was making a profit when they went public in their Wall Street-underwritten IPOs, and most had no prospect of ever making a dime, either. The trouble is, it wasn't long before mean old Mr. Microsoft turned up and decided to spoil Happy Tooth's fun by coming up with a browser-thingie of its own - the so-called Internet Explorer. It was what you'd call really bad news for Netscape since, as everyone knows, Microsoft Corp. already owned the entire earth, and now it apparently wanted the browser business, too. And, geez, if Netscape couldn't make a profit without Microsoft in the browser business, how was it going to make a buck with Microsoft in the game?
It wasn't long before investors realized the same thing, and Netscape suddenly wasn't worth so much anymore, falling from a high of $83 per share in early 1996 to its present price in the mid-20s. Before then, however, every conceivable Internet company you could think of also had gone public, hoping to become "the next Netscape."
There was Yahoo!, a company that had a computer program called a search engine that you could use with Netscape's browser (or Microsoft's for that matter) to go hunting all over the Web for exactly what you wanted. There were Yahoo! look-alikes named Lycos Inc., Excite and Infoseek Corp. - all with their own same-thing-only-better search engine thingies. There was a company called @Home Corp. that had a thingie to make anybody's browser run faster. And, of course, there were plenty of companies intent on producing "content" for the Web - this being the "cool stuff" you were presumably panting to look at and read in the first place.
Unfortunately, not one of these companies was making a profit when they went public in their Wall Street-underwritten IPOs, and most had no prospect of ever making a dime, either. That is why nearly all their offering prospectuses came stamped with Securities and Exchange Commission-mandated "high risk" warnings to ward off unwary investors.
At first it looked as if Wall Street's Internet craze would burn itself out on failed IPOs. In April 1996, Goldman, Sachs & Co. brought Yahoo! public at $12 per share. The stock instantly spurted to $28 (split adjusted) in the after-market, then keeled over and within four months was selling for $11 per share. Excite, Lycos and Infoseek behaved the same. So, too, did CNet, which went public in July 1996 at $16 per share. The stock quickly spurted to $21 in the after-market, then slumped and within two months was selling for $12 per share. It was the same with a company called Cyber Cash Inc., which makes cybermoney (what else!). The stock went public in February 1996 at $15 per share, soared to $63 in the after-market, then began a slow, relentless slide that carried it back to a mere $10 per share by last summer.
Whaddaya say, guys, are we beginning toThey were being hyped to the moon by the sales forces of the underwriters during the walkup periods to the offerings, creating lots of feverish excitement in the press about the "next hot IPO." see a pattern here? In fact, the same thing was happening with nearly all these stocks: They were being hyped to the moon by the sales forces of the underwriters during the walkup periods to the offerings, creating lots of feverish excitement in the press about the "next hot IPO." Then when the deals came to market, momentum-investors piled into the shares in the after-market, rode them as far as they could, then bailed out and the prices collapsed - for the simple reason that there was nothing buoying them aloft but hot air all along.
For the edification of readers, we've thus put together an index of 18 of these sucker-bait stocks: the "Observer Internet Sucker's Index". And with nearly every stock in it, from AMZN (Amazon.com Inc.) to XCIT (Excite), the pattern is the same - a post-IPO price surge fueled by unharnessed hype regarding the future of the Internet, followed by a dose of reality as it became clear just how distant any profits really were.
About a year ago (April 23, 1997), the total market value of the 13 companies in the Index stood at roughly $10.4 billion, with most of the stocks trading at or near their all-time lows. Adjusted for opening-day prices of the five additional stocks that we added as the year progressed, the market value would have stood at $13.6 billion. But then, this last autumn - awakened, we may assume, by the same mysterious forces that cause swallows to return to Capistrano and Eskimos to roll over in bed simultaneously - every stock in the index awakened and started rising in value for no apparent reason other than the fact that all its competitiors were doing to the same.
As a result, between May and December 1997, the market value of the Index rose from $13.6 billion to $24.2 billion, a 78 percent increase in just eight months. But in keeping with the well-documented yet totally perverse phenomenon that the stock market is the only place on earth where rising prices can cause a stampede of "bargain hunters," the price run-up between May and December simply whetted investor appetites to own Internet stocks no matter how costly they got.
Between January and April of this year, roughly half the time of the preceding period, the value of stocks in the Index soared 54 percent more, to a total market value of $37.3 billion - almost triple the value of 12 months earlier. "It's a buying panic," summed up a Merrill Lynch & Co. analyst, Joseph Cohen, as the stampede intensified.
All together, we're talking a market capitalization that is very near equal to the entire American publishing industry as tracked by the Value Line Investment Survey. Except for just one thing: In 1997, the 49 publicly traded companies of the American publishing industry reported $7 billion in revenues and $318 million in total net income. During the same period, the companies in the Index took in total revenues of only $3.6 billion, yet managed to rack up aggregate net losses of $421 million.The market performance of some of the companies suggests a whole new principle of stock valuations for Internet stocks alone: a "price-losses" multiple.
The stock market performance of some of the companies in this Index is so hilarious as to suggest a whole new principle of stock valuations for Internet stocks alone: Instead of a traditional "price-earnings" multiple, why not a "price-losses" multiple?
In that regard, consider @Home, which has a technology that is supposed to make your home computer run faster on the Internet. During 1997, revenues rose from $700,000 to $7 million, which is big in percentage terms but trivial in absolute dollars. On the other hand, @Home did manage to turn in some amazing numbers elsewhere in its financial statement - namely, the loss column, where it racked up total losses for 1997 of an utterly mind-blowing $219 million. Yes, folks, you read that right: $7 million in revenues yields $219 million in losses. Meanwhile, @Home's stock price doubled, and until just a few days ago was selling for more than $33 per share, giving this company a Wall Street market value of $3.92 billion. If the company can only manage to lose a couple of hundred million more, would its stock price double again?
Unfortunately, we may never know, because after Netscape's announcement you could almost hear the virtual air escaping from Wall Street's cyberspace balloon. In four days of trading, Yahoo! gave back 8 percent of its gains, @Home lost 11 percent, Excite gave back 20 percent, Infoseek dropped by 22 percent and the others in the Index did the same.
Bottom line? These aren't investments, they're financial toys for speculators. They were manipulated upward by momentum players and investment bank hustlers, and now it looks as if short-sellers may soon be starting to manipulate them back down again. In short, anyone who goes near these stocks will sooner or later get his pockets picked. Stay away!
Christopher Byron
Reprinted with special permission of the New York Observer newspaper.
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