:::FEEDING FRENZY; INTERNET-LINKED STOCKS SELLING LIKE HOT CAKES
Ben Sullivan Daily News Staff Writer
July 8th
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.''
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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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