WSJ 2nd lead (the press is becoming more cautious). Its now being compared to the biotech bubble. Note that these two stories are ahead of yesterdays DOW's 93 pt rise and eighth straight gain, the longest winning streak of the year:
The magnitude of Internet stocks' price increases and market values dwarfs speculative frenzies in recent memory, such as the one for biotechnology stocks in 1991.
There's No Mania Like Net Mania;
Historically, This May Take the Cake
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
The U.S. has seen stock manias before, but nothing, it would appear, on
the scale of the current frenzy for Internet stocks.
The magnitude of Internet stocks' price increases and market values
dwarfs what some longtime market watchers recall in previous speculative
frenzies, like that for biotechnology stocks in 1991. And compared with
America Online's trailing price-earnings ratio of 418, the 95-times-earnings
Polaroid hit in 1972 at the peak of the "Nifty Fifty" era was a model of
value investing.
"If you were looking for something that was a
fitting finale to the biggest bull market in
history, it would be the biggest speculative
mania in history -- and that's what it does look
like," says Robert Farrell, senior investment
adviser at Merrill Lynch.
A veteran market analyst, Mr. Farrell recalls
similar crazes for franchise and
computer-leasing companies in 1968, and for
bowling stocks in 1961.
"The big public participation and parabolic price rises, the initial public
offerings going up more than any other IPOs have on the first day of
trading -- that kind of thing has happened before. The only difference is the
extent and size of it. These stocks are getting to be worth more than many
of the old-line blue chips."
For example, at its record close Monday of $157.25, America Online had
a market value of $72 billion, which would have ranked it 33rd largest in
the Standard & Poor's 500-stock index, to which it will be added at
Thursday's close. That's bigger than PepsiCo, Gillette or General Motors.
(Tuesday, AOL's value slipped to $70.8 billion.) Yahoo would have
ranked 84th, while Amazon.com would have been No. 118. All three
declined Tuesday while the S&P 500 rose, depressing their rankings.
The Company That They Keep
The Biggest Internet Stocks...
Market Cap
(billions)
Revenue-a
(billions)
America Online
$70.8
$2.90
Yahoo!
26.6
0.15
Amazon.com
17.5
0.42
eBay
11.0
--
AtHome
9.6
0.03
Network Associates
8.2
0.82
Netscape Comm.
6.6
0.57
E*Trade Group
3.3
0.20
CMGI
2.9
0.11
Excite
2.5
0.12
...Rival the Size of Old Standards
Market Cap
(billions)
Revenue-a
(billions)
Walt Disney
$62.4
$23.0
Colgate
27.5
9.0
J.P. Morgan
18.5
19.0
J.C. Penney
12.4
31.0
RJR Nabisco
9.5
17.0
Gateway
8.0
7.1
New York Times
6.6
2.9
A.G. Edwards
3.3
2.2
American Greetings
2.8
2.2
B.F. Goodrich
2.5
3.8
a-Latest 12 months
Source: Baseline, WSJ research
Shares of eBay, which had revenue of $12.9 million in the company's
third-quarter report, its first after going public Sept. 23, have a market
value of $11 billion, exceeding Federated Department Stores, with
third-quarter revenue of $3.6 billion.
"I know of no new-issue market that has exploded on the scene with this
degree of intensity," says Jeremy Siegel, a professor of finance at the
Wharton School and a renowned markets scholar. He says buyers of the
stocks must believe not only that the Internet is as revolutionary as the
telephone or telegraph, but also that any future profits won't be lost to
competition. "That's where a lot of us have problems," Prof. Siegel said.
"We're not denying the revolutionary aspect of the Internet."
Except for some high-profile analysts, most of Wall Street is skeptical of
the Internet craze. Mr. Farrell says that at year-end luncheons, a regular
recommendation is to sell "short" an Internet stock. (Short sellers hope to
profit from a decline in a stock's price.) Individual investors appear to have
far more faith.
These professionals aren't skeptical so much about the value of the Internet
or that some companies will make a fortune on it. Rather, they are
skeptical that so many companies can hope to survive, let alone meet the
expectations built into their stock prices.
"Survivability, not valuation, is the key issue," Edward Kerschner,
investment strategist at PaineWebber, wrote in a May report. He drew
parallels between Internet stocks and personal-computer stocks, darlings
of the 1982-83 bull market. At the end of 1982, the most-prominent PC
makers were Apple, International Business Machines, Atari, Commodore,
Tandy and Texas Instruments. Only Apple "was a good long-term vehicle"
for playing the PCs business, and most of today's leaders -- Compaq
Computer, Dell Computer or Gateway 2000 -- weren't even public at the
time.
The best parallel to the Internet mania was the craze of biotechnology
stocks in 1991-92. These were companies that similarly rarely had
revenue, let alone earnings, and therefore defied standard valuation efforts.
According to Securities Data Co., 101 biotech companies went public in
1991 and 1992, raising $4.4 billion. Only 44 are still trading.
By comparison, Securities Data counts 73 Internet companies that have
gone public since the beginning of 1997, raising $4.6 billion. (AOL and
Yahoo have been public for more than two years.)
But by one measure, the Internet mania has been far more intense: Internet
shares have gained an average of 38% on their first day of trading,
compared with the 7.5% average for biotech companies, Securities Data
calculates.
One lesson of the biotech and other technology manias, Mr. Kerschner
wrote, is that "too much will be paid for even the best companies." He
noted that Amgen, the leader of the biotech group, didn't sustainably break
its end-of-1991 level until 1995. (In an eerie parallel to America Online,
Amgen entered the S&P 500 on the last day of 1991.) "Amgen was a
great company but an overpriced stock."
Even if AOL's per-share operating profit was to grow 50% a year for the
next five years, investors are now paying 55 times those five-years-out
earnings. But that might be justified if it survives an industry shakeout that
vanquishes dozens of competitors.
"At current valuations, I can't say AOL is a good buy," says Aash Shah, a
fund manager at Federated Investors. "But AOL will be one of the
long-term successes within the Internet space."
Prof. Siegel notes that many investors doubted IBM could sustain its
double-digit earnings growth in the 1960s. Skeptical investors were
reluctant to pay the high price its stock consistently commanded relative to
earnings -- thus passing up one of the most impressive companies of the
era. "There are arguments ... these growth premiums might have some
justification," says Prof. Siegel. |
