Stocks Soar, Dip, and Soar Again, Leaving Money Managers Perplexed
By Nelson Wang
At Hambrecht tech conference, one big question: How high is up? What's the prevailing sentiment among money managers and venture capitalists about the runup in Internet stocks during the past few weeks? Apparently it's bewilderment, if the mood at the annual Hambrecht & Quist technology conference in San Francisco last week was an accurate indicator. Despite some concern after Internet stocks got pounded on Monday on fears of a Fed interest rate increase, few attendees were surprised when most of them rebounded strongly on Tuesday and Wednesday as investors saw the drop-off as a buying opportunity, just as they have done all year. "The prevailing wisdom seems to be that if it went up yesterday, it's a bargain today," joked one venture capitalist, adding that it was as if someone had given the market a massive dose of Viagra, the new anti-impotence drug from Pfizer.
One perplexed technology fund manager who had taken his profits in Net stocks months ago told of a conversation he had with a broker friend in which the friend described how one of his clients--an elderly woman--had asked him to sell all her bonds and blue-chip stocks and buy Internet stocks. When he cautioned against it, she threatened to fire him. "I don't know--do you think this means we're in for some kind of hit?" the friend asked the money manager, pointing to the conventional wisdom that whenever there's such widespread enthusiasm for a stock or a sector, it's a sign that a top is near.
Two networking analysts for a mutual-fund company scratched their heads as they tried to understand how Amazon.com's stock could be up 12 points on Tuesday after the company merely reported that it had lost less money in the first quarter than expected. "It's crazy--investors are valuing Excite based on what Yahoo is doing, and Lycos based on what Excite's doing, when the fact is that if Yahoo is successful, none of the others will be," said one of the analysts.
But there were also a few there who, while acknowledging that valuations had gotten ahead of themselves, felt that the risk in some cases was justified because some of these companies are destined to become huge players. Fred Kobrick, a venture capitalist, pointed out that Amazon.com is now the third-largest bookseller in the country, and it didn't even exist three years ago. He also observed that America Online has set the precedent of spending lots to get market share early and then reaping the benefits later. "It's nice to have technology, but you need customers," said Kobrick.
Noting that the average price-to-sales ratio for Internet stocks is about 35, while that of the already high software sector is just 5, another prominent VC player, Roger MacNamee, said that a fundamental shift in the economy seems to be taking place similar to that ushered in during the 1980s by the personal computer companies such as Microsoft, Compaq, and Novell, whose stocks have risen to dizzying heights from their initial offerings. "I have no doubt that some of these [Internet] companies will make us very rich," MacNamee said. Hambrecht & Quist's own Internet analysts shrugged off questions about valuations at a session for reporters--what truly mattered, they asserted, was whether companies had succeeded in establishing their brands and were dominating their categories. "Even though stock values sometimes get out of whack with the pace of growth, [the Internet] has been an enormous, enormous development," said Bruce Lupatkin, Hambrecht & Quist's director of research.
Analyst Paul Noglows was loath to specify any Internet stocks he didn't like at the moment, because enthusiasm for the sector as a whole is so great, he said, that also-rans aren't getting valued as such. "The market is fairly forgiving at this point," Noglows said. Spending starts to pay off
In support of the optimists, there are signs that some of the more mature Internet companies--if one can call any company that's just a few years old "mature"--are starting to reach a point where their high-level expenditures early on are beginning to pay dividends. America Online, for example, reported strong cash flow and a significant decline in the percentage of revenue that was going toward sales and marketing. Yahoo, for its part, has seen its operating profit increase steadily as it leverages revenue opportunities off its audience of an estimated 30 million unique users, and Amazon.com also has reported steadily improving margins.
Despite these successes, many attendees seemed to be steering clear of Net stocks, leading some to believe that most of the people buying Internet stocks are individual investors. How they will react when their company misses a quarter and loses a third of its value in one day would be anyone's guess.
Perhaps MacNamee summed up the current feeling best, though, when he cautioned a luncheon crowd never to underestimate the hypnotic power of the Net. As he noted, there are many real opportunities out there, but there's also a lot of hype. The hype we've been used to hearing was about how the Internet was going to change our lives--now, the hype is about how it's going to make us all rich. |
