FEEDING FRENZY; INTERNET-LINKED STOCKS SELLING LIKE HOT CAKES
Ben Sullivan Daily News Staff Writer
And you thought the Beanie Babies craze was bad.
With a fervor that would put the most aggressive doll collector to shame, investors in recent weeks have scrambled to buy Internet-related stocks, often with little regard for the companies' earnings or prospects for long-term success.
Typifying this rush toward online issues, investors this week sent shares in Lycos, a developer of Internet search engine software, up 26 percent to $ 99.56 on news that the company planned a 2-for-1 stock split.
While increasing a company's shares, a split has no impact on underlying business and, therefore, should have little effect on overall price. But not only did the announced split give Lycos a major boost, competitor Excite enjoyed a collateral gain on mere speculation that it would be the next Internet stock to split.
''That's when lunacy starts, when investors start bidding up a company 20 points based on a stock split alone,'' said Abhi Gami, an Internet analyst at investment bank William Blair & Co.
Like most in the Internet sector, Lycos and Excite both lost ground Tuesday as the market took a breather. But since June 1, Lycos is up 69 percent, Excite has gained 87 percent, America Online is up 38 percent and online bookseller Amazon.com is ahead a staggering 185 percent. While these companies are clearly market leaders, a wider index of Internet-related stocks compiled by Interactive Week magazine has risen 29 percent since June 1.
''All these stocks are on tremendous momentum,'' CIBC Oppenheimer analyst Henry Blodget told Bloomberg News.
Industry trackers say a combination of fear, ignorance and greed is fueling the rush toward Internet stocks.
Institutional investors are partly to blame, arguably waiting too long to get into Internet stocks and then, fearing they've missed the boat, throwing large sums of money at a few key players. Monday's surge, for example, was led by reports that two big mutual fund companies, Fidelity Investments and PIMCO Advisors, would heavily invest in Internet issues.
But mom-and-pop investors bear some responsibility, too. With the growth of online trading through companies like E-Trade, DLJ Direct and others, armchair investors have turned to what they know when buying stock.
''A lot of this,'' Gami said, ''has been on the backs of retail investors - people who aren't listening to financial advisers, but are using Yahoo every day and reading in their newspaper about the growth of the Internet. They're not focusing on fundamentals.''
But even for the professional trader, valuing an Internet stock can be tricky. With most companies lacking a track record of earnings, old standards like price-to-earnings ratios prove nearly worthless.
Super-investor Warren Buffett summed up the feelings of many earlier this year when he challenged anyone to explain how to accurately value an online firm. Buffett said that if he worked as a business professor, he would ask that question of all his students. Any who deigned to offer an answer, Buffett said, would immediately flunk his class.
''A few of my colleagues on Wall Street are like that, saying, we don't know how to value these firms, only it's a big market, it's going to get bigger and you want to own these stocks,'' Gami said.
One way to judge the value of a company is to see what price suitors have paid for its competitors. The Walt Disney Co. and General Electric's NBC recently handed out substantial premiums for stakes in Infoseek and Cnet, respectively. Analysts say speculation that remaining Internet companies will enjoy similar gains if and when they are bought by larger media players also has contributed to the sector's inflated prices.
Also, by entering the Internet market through acquisitions rather than building their businesses from the ground up, Disney, GE and others are securing spheres of influence in cyberspace, Gami said, making it harder for newcomers to get established. The flip side of that, he added, is that existing Internet companies share that buffer against new competitors, making their stock arguably more valuable.
Because of that, Gami said, the lather investors have found themselves in over existing Internet companies probably won't abate any time soon. Besides, he said, ''so many people have bought on guesses and momentum that even after today's hiccup, there's still a lot of guys out there who want to play with their positions. I don't know if this is it.''
WHAT'S GOING ON?
Shares of Internet-related companies have increased spectacularly in recent days, furthering a sector rally that began more than a year ago. Why the runup? Investors are focusing on two segments of the Internet industry - portals and retailers - and bullish on both.
PORTALS
WHY PORTALS? Portals are the doors through which Internet users travel. It's generally believed that as computers and televisions merge, these portals will be the key entree point. If portals indeed become the starting point for net/TV viewers, that would mean tens of millions of viewers a day. And that would mean lots of advertisers and advertising revenue.
WHO KNEW? NBC's investment into Cnet earlier this summer was the first major financial stake by an entertainment company into a portal company. Walt Disney Co.'s investment into Infoseek last month sent investors scrambling to guess which portal company would be next.
WHAT HAPPENED?
COMPANY TUES. CLOSE INCREASE SINCE JUNE 1
America Online $ 108.875 38.25%
Excite Inc. $ 96.25 87.35%
Inktomi Corp. $ 76.50 112.50%
Lycos Inc. $ 85 69.15%
Yahoo! Inc. $ 191 82.99%
RETAILERS
WHY RETAILERS? Investors are bidding up retailers with operations on the Internet, under the assumption that as more people connect to the Internet those companies will have a head start on making sales. Investors don't appear to be too discriminating when it comes to Internet retailers: Shares of Barnes & Noble and Borders have risen dramatically, for example, even though the vast majority of both retailers' income comes from brick-and-mortar stores.
WHO KNEW? The king of Internet runups is Amazon.com, which has gained 920 percent in the last 12 months. Amazon is the leading online bookseller, and is singled out by investors as a successful Internet-based business even though the company lost $ 9.26 million in the first quarter of 1998.
WHAT HAPPENED?
COMPANY TUES. CLOSE INCREASE SINCE JUNE 1
Amazon.com Inc. $ 121.125 185.26%
Barnes & Noble $ 43.25 28.39%
Borders Group $ 38.125 22.00%
Egghead.com Inc. $ 15.50 119.47%
Zapata Corp. $ 17.50 72.84%
Source: Daily News research; Bloomberg News
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INVESTORS OUT OF CONTROL IN A WEB OF SPECULATION
: By AMY FELDMAN
The mania for Internet stocks followed by yesterday's quick selloff is deja vu all over again for those who remember earlier market madnesses.
The double-digit swings of the past 48 hours have encompassed search engines like Lycos, Excite and Inktomi, online retailers like Amazon.com and Egghead.com and Internet directories like Yahoo!
Some savvy market matchers think the big numbers and the big swings in stock prices look similar to the late 1980s for biotech stocks. Or, perhaps even more speculative than that.
"Lunacy is a touch too strong, but just a touch," said Hugh Johnson, chief investment officer at First Albany. "This is right out of all that great literature on speculative manias."
In every speculative mania, the bubble eventually bursts, though no one can tell how long it will take or which stocks will burst first.
"People are just blindly throwing their money into this area," laughed Bill Burnham, an electronic commerce analyst at Credit Suisse First Boston. "Just because the Internet is going to grow doesn't mean that everyone with a business plan and $ 10 in their pocket will make a fortune."
How quick are investors snapping up these shares?
Just look at Inktomi, an Internet search engine company which has minimal revenue and hasn't turned a profit that went public June 10. From its $ 18 debut, Inktomi's shares have more than quadrupled to $ 76.50.
"Search engines are hot, so Inktomi is hot. But there are a lot of search engines out there, so they've got a lot of convincing to do and a lot of sales to do," said Lawrence York, portfolio manager of the WWW.Internet Fund.
Inktomi was one of the few online stocks to keep rising yesterday. In the selloff that followed the recent mania, investors sent shares of Internet bookseller Amazon.com plummeting 177/8 to $ 121.62 and those of search engine Lycos tumbling 149/16 to $ 85.
But even with yesterday's dramatic turnabout, share prices remained high.
Investors have valued online bookseller Amazon.com at $ 6 billion twice that of Barnes & Noble, which sells books both online and offline.
And Yahoo!, despite its 81/4 drop yesterday to $ 191, still has a market value greater than chemicals giant Union Carbide, a long-time member of the Dow Jones industrial average.
Search engines Lycos and Excite zoomed up Monday, and then zapped back yesterday as investors went manic-depressive on Internet shares.
Robert Sobel, a business historian and senior fellow at the Milken Institute, compares the current frenzy for Internet stocks to earlier buying waves into then-new technologies like computers, radio and automobiles.
In each case, investors furiously bid up the prices of dozens of firms on excitement about new technology. But in the inevitable shakeout, only a few companies became giants and most went to the dustbin of history.
"Maybe one of these companies will become number 5 or number 6 on the Fortune 500," he said. "But there's no way to know which one it will be."
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Internet companies lead rise in stocks; Lycos shares soar 26%; Dow jumps 66.51 points to highest close since May; Wall Street
SOURCE: BLOOMBERG NEWS
NEW YORK -- U.S. stocks rose yesterday as borrowing costs fell to near-record lows and Internet mania carried Lycos Inc., Yahoo! Inc. and Egghead.com Inc. to all-time highs.
The Dow Jones industrial average rose 66.51 to 9,091.77, its highest close since May 22. The Standard & Poor's 500 index gained 10.89, or 1 percent, to a record 1,157.31, and the Nasdaq composite index climbed 15.47 to 1,909.47.
Those gains were dwarfed by advances in Internet stocks, which jumped as much as 65 percent yesterday.
Lycos sparked the rally, after the No. 4 Internet search directory company said it will split its stock 2-for-1. A stock split has little bearing on a company's prospects, but many investors take it as an optimistic signal. Lycos soared $ 20.50, or 26 percent, to $ 99.5625.
Yahoo! gained $ 26.375, or 15 percent, to $ 199.25. Its shares have almost tripled this year.
Excite Inc. rose $ 8.0625, or 8 percent, to $ 107 and NetGravity Inc. gained $ 7.875, or 41 percent, to $ 27.
Lycos and others soared to records in recent weeks on speculation that large media companies will invest in or acquire them. The expectations were fueled by NBC's investment in Cnet Inc. last month. Excite Inc., EarthLink Network Inc. and MindSpring Enterprises Inc. have announced stock splits, driving their shares higher.
Egghead.com jumped $ 5.8125, or 65 percent, to $ 14.8125 after reporting that revenue on its Internet auction site almost doubled in the first quarter ended June 27, to $ 13.7 million.
Inktomi Corp., which develops software designed to reduce congestion on the Internet, soared $ 25.625, or 53 percent, yesterday, to $ 73.625. Inktomi sold shares to the public June 10 for $ 18.
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7/7 : Nasdaq Update, CNNfn
Bill Tucker, Lauren Thierry
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
LAUREN THIERRY, CNNfn ANCHOR, IN THE GAME: For a check on some stocks moving in the Nasdaq market this morning, let's turn it over to fn's Bill Tucker. He is standing by at the Nasdaq marketsite.
Bill.
BILL TUCKER, CNNfn CORRESPONDENT: Lauren, thank you. We have the Nasdaq Composite now in negative territory, down a little bit more than 1 point at the 1908 level. Advancers and declines running very tight in this market with the decliners holding a slight edge by maybe a 100 stocks. Good volume, though, 135 million shares have trade on the Nasdaq stock market. And finally, some reality seeped into these Internet stocks.
Let's take a look at the five most actively traded issues and see what I'm talking about. We begin with Egghead egghead.com > Computer. This stock strong, yesterday, continues to show strength today. That on some positive fundamental news. Egghead.com announcing that the revenues at its online auction sites are very strong, and up. Investors buying on good solid news in terms of cash flow. The stock up 2 7/16, 10 1/2 million shares have traded.
Computergram International
July 7, 1998
EGGHEAD TOUTS FIRST-YEAR INTERNET AUCTION SALES
Egghead.com Inc, the ailing software and hardware retailer that shut down its retail operations to concentrate on internet sales, said that its online auction business has generated $ 28.2m in the first year of operations. That total includes $ 13.7m for the recently-completed first quarter, up from $ 7.0m in the preceding quarter. Registered bidders have grown from 29,000 in September to nearly 170,000 last month. Egghead offered the success of its auction site as proof that consumers are accepting the company as an internet commerce firm. As far as other portions of the company's business, Egghead would not make any financial comment ahead of July 28th's quarterly report. Since the closure of the 80 retail outlets and distribution center in February (CI No 3,336), the company has focused on its existing catalog business - which it will eventually phase out - and three web sites: Egghead.com, which offers new and front line hardware, software and peripherals as well as some "specially-priced" previous version products; SurplusDirect.com, which markets surplus items, older version and discontinued products and refurbished hardware products at discount prices; and the aforementioned auction site, which sells large lots of discounted products. The company has even used the auction site to branch out from its core computer products business, having seen some success selling consumer electronics and even jewelry. While it is too early to say whether that sort of thing will find its way onto the other sites and Egghead will become a more "general" internet trading outfit, a spokesperson said that management is exploring a general broadening of the product line, as well as testing different marketing formats. Following the announcement, Egghead shares responded to the encouraging news by jumping $ 5.8125, or $ 64.6% to close at $ 14.8125. In all, the shares have risen nearly 150% since the move to the internet-only sales model was announced in January and the shares were trading at around $ 6. The share price gains and apparent financial success did not come cheaply, however, with the layoff of about 80% of the company's 1,000 workers resulting in a fourth-quarter charge of $ 37.6m and a net loss of $ 35m.
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