From: +Robert Rose
Hello Donald:
Glad to see my favorite stock sector brought up on this thread today. I read this thread for input on the technicals of the overall market, and I read and post to some individual inet stock threads for mostly fundamental information on those companies. What I am still missing is a good thread discussing the technicals of the inet sector in general and specific stocks in particular. If anyone knows of such a thread, please speak up! (The Amazon thread is the closest to this that I've found so far.) Now for some comments to your comments.
<I was reading somewhere that these phenomenons of upward explosiveness have a
relative short longevity, of only a few years. >
To put the internet phenomenon into perspective, I suggest a book that has revolutionized my thinking about technology investing: The Gorilla Game, by Geoffrey Moore. For anyone who invests mainly in Nasdaq stocks, this is a must read.
Moore talks about the Tornado as being that period when a technology is adopted on a mass scale. This is the period when companies involved in supplying products or services for the tornado technology experience hyper-growth, typically increasing sales 100% or more per year. PC companies were in the tornado in the early 1980s, networking and internetworking companies were in the tornado in the early 1990s, and clearly, the Internet companies are in the tornado today.
However, it is important to note that the "Internet" is a catchall phrase that encompasses many subsectors: browsers, ISPs, portals, business-to-business e-commerce, consumer e-commerce, etc. Clearly, the browser tornado is over (as Netscapes stock price would suggest), we are still in the midst of the portal tornado (as Yahoo's, Excite's and AOL's stock prices would suggest), and e-commerce is just entering the tornado now (as Amazon's stock price would suggest). I expect the overall Internet tornado to last at least 10 years, with the e-commerce tornados comprising a large part of that, given that it will take a fair amount of time to revolutionize such an important part of our lives as the way we purchase our products.
<Please correct me if I am incorrect - The
TULIPs, and the early trading companies hundreds of years ago went thru explosive
growth but did not last long. Tulips and trading are still around.>
The Tulip analogy is the favorite of the bears on the Amazon thread. While it is true that tulips from ~1639 - ~1642 in Holland and the Internet stocks from 1996 - ? in the U.S. both experienced phenomenal appreciation, a very important distinction must be made. Tulips are only pretty to look at, and thus have value only as a commodity, luxury or fad, depending on how a society chooses to view them at a given time. The Internet, on the other hand, is truly transforming our social and economic lives, as any poster to SI or online stock trader must admit. This distinction could have important implications for the Internet stocks' ultimate potential for appreciation.
< The internets started a few years ago but the craze really started this year. How long did
the craze last for NSCP and IOM. I checked the charts and it appears that they both
peaked near the beginning of 96 and within approximately 1 year they lost more than
half of their value. Does anyone know how long the TULIP and TRADING
COMPANY craze lasted.>
See above.
< I am suspecting that these market crazes last about 1 year.
I realise that many will say that the internet is the way of the future and they will be here
to stay, and I fully agree, just the same way tulips and trading and Netscape are still
here. >
See above.
<I guess what I am saying is that once the INTERNUTs become the norm/widely
accepted, reality will step in and the craze will be over. The internets, in general, will still
be here but I feel that they will lose a substantial part of their value and some may even
go under.>
Yes, eventually, that is true. In 1994, Cisco's stock suddenly dropped 40% when it reported earnings at less than 100% growth per annum. The aggressive growth funds sold the stock and the growth and income funds bought up these shares. But the latter funds were only willing to buy at a PE multiple significantly lower than that at which the stock had been trading.
Eventually, the same will happen to the Internet stocks. When? It depends on when an individual company's Internet subsector leaves the tornado. Some companies such as AOL and YHOO appear to be transitioning from one subsector tornado to another - AOL from ISP to Portal to E-commerce to ?, and Yahoo from Portal to E-commerce to ?. If certain companies continue to transform themselves in this way, they will be able to ride most or all of the general Internet tornado and perhaps piggyback onto the next mega-tornado, whatever that might turn out to be. If so, these companies could become the next Microsoft, or perhaps even something greater. (Of course, Microsoft has entered the Internet space big time, and so is transforming itself in order to exploit the current tornado.)
< In the near future, the market will have a better understanding of how to value the
internets, and when that happens reality will take over.>
Yes. For example, Wall Street is giving Amazon about two years to be profitable. If Amazon fails to meet the Street's earnings expectations at that time, all hell will break loose for the stock. Or if the company's top-line growth slows down before then, the stock will nose-dive even sooner.
< Heres my guess - the internets could peak within the next 6 months, and about 1 year
thereafter the internets could lose 1/2 or more of their value, so that would put a major
decline to end by mid 2000 or earlier.>
Again, it depends on an individual company's subsector, IMO. For example, all "Internet" companies are not experiencing the current frenzy that the familiar names are experiencing. Sometimes this is due to problems peculiar to a given company, but often times it is because a perfectly good company's inet subsector has not yet entered the tornado.
< Of course there will be a few internets doing better than the rest, and may not be hurt as
much.>
See above re: piggybacking inet subsector tornados.
< As for the market, a short-term top should be here within 3 days - but the dip may be
so small(maybe only intraday), that most wont even notice it. However, I also believe
that a MID-TERM TOP(30 days) is near buy and should occur in DEC. Yeah, I realise
that most feel we are heading up strong still. Outside of SI, there are very few of those I
have contact with that feels we are near a TOP - most are saying 10000 definitely by
1st quarter.>
< Although the new highs did get above 100 yesterday, there are still many indexes which
are lagging the major indexes (RUT,XAL,TRAN,FPP,CYC,BKX,XBD(although
BKX/XBD did show strength yesterday)).>
< Seeya >
This is your department, Donald. Whatever you say in this regard is gospel in my book!
Best Regards,
Rob
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