Internet Has Bred a Culture
That Values Quick Speculation
By GEORGE ANDERS
Staff Reporter of THE WALL STREET JOURNAL
What would it take to double or even triple my company's stock price?
That question tempts thousands of corporate
bosses each year. Maybe an acquisition spree
or a research breakthrough will send the stock
soaring. Maybe years of cost-cutting and
layoffs are needed. Or maybe it just isn't
possible to do anything so breathtaking that
investors will leap to their feet, cheering wildly.
In the age of the Internet, though, it's much easier to be a hero. Ask Herm
Rosenman, who runs Bikers Dream Inc., a Riverside, Calif., motorcycle
maker. Until a few months ago, he was an online neophyte. Then his wife sent
away for BISyman, a standard software package that she calls "an online store
in a box." Mr. Rosenman told a reporter for a financial Web site that the
company soon could sell cycle parts over the Internet. Suddenly, Bikers
Dream became the hottest stock in America.
All in One Day
On Dec. 29, Bikers Dream jumped 167%, to $6.84 a share, on Nasdaq
composite volume of 7.9 million shares. In essence, each of its one million
freely available shares changed hands eight times that day, as frenzied day
traders swapped the stock back and forth. The next day, the stock surrendered
much of those gains, as traders realized that the company's Web site wasn't
fully working yet and that online sales would be just a tiny part of its business
for many months to come.
"It's crazy," says Mr. Rosenman. "I think we'll
have a good Web site, but I don't see any reason
why the stock should move like this. It shows
you how people go nuts anytime you mention
the word 'Internet.' "
It is fashionable to view the current Internet hysteria as just another case study
in the madness of crowds, reminiscent of past manias for everything from
tulip bulbs to biotechnology stocks. This time, however, something extra is at
work. The Internet itself -- with all its power to spew out information and
connect millions of people -- is turning a meaningful part of the investing
public into hair-trigger speculators.
Financial chat groups are proliferating online, as swarms of users swap
favorite stock tips. Online brokerage firms are making securities trading as
easy as sneezing, thanks to trifling commissions and the ability to buy or sell
with just a few mouse clicks. Put together, these forces mean that investor
stampedes can form faster and more unpredictably than ever before.
In essence, the Internet is creating its own financial turbulence, and it isn't
likely to stop anytime soon. Online investors currently are focusing on the
industry they know best and care about most deeply: the Internet. But in years
to come, the chat-and-click brigade could rock almost any market sector.
Fast and Furious
Last year, the average Internet stock climbed 225%, according to Goldman,
Sachs & Co. A three-year-old company specializing in online auctions, eBay
Inc., went public in September at $18 a share and traded at more than $240 by
year end. As one astonished analyst noted, eBay increased its stock value 10
times within 10 weeks of going public. By contrast, the greatest stock-market
success of the century, Microsoft Corp., took four years to achieve the same
feat.
This year, even Internet boosters are braced for
trouble. Venture capitalists are basing decisions
on an assumption that online stocks' values
might be cut in half, and a leading Web-based
pundit is telling readers to gird for a 40% drop.
General concern that stock prices are out of
control makes it harder for online-industry
leaders to negotiate acquisitions, recruit new talent or even stay focused on the
unglamorous chores needed to build a business.
"I believe the Internet has huge economic implications, on a par with the
arrival of gasoline or the printing press," says Jeffrey Brody, a partner in
Brentwood Venture Capital. His firm has bankrolled more than a dozen
Internet start-ups, and Mr. Brody is looking for more. "But the current
capital markets," he says, "scare the heck out of me."
In an ominous sign, investors in Internet stocks are holding those shares for
ever-shorter periods. In the summer of 1997, it took 58 days for trading
volume in Amazon.com Inc. to equal the book retailer's entire shares
outstanding. By August 1998, that figure had dropped to 22 days. Last month,
it was a mere 13 days. Axxel Knutson, a market analyst in Warren, N.J., says
he usually tells clients to attempt short-term trading plays of six to eight
weeks. In the Internet sector, he says, "that time has been cut in half."
Calculating holding periods isn't a precise science because many shares of
Internet companies are held by company founders or venture capitalists, who
generally haven't sold much. That means, however, that current stock prices
are driven almost entirely by short-term traders, who seldom know a
company in detail.
Hours-Long Ownership
In Boston, computer consultant Charles Molinary says he made a whirlwind
600 trades on a $150,000 portfolio last year, racking up a 50% gain after
commissions. Almost all his action was in Internet stocks. "I bought and sold
Yahoo! Inc. 50 times," he says. "I traded OnSale Inc., eBay, you name it."
Often, Mr. Molinary says, he owned stocks for just a few hours. His shortest
play: a seven-minute investment in uBid Inc., just before Christmas. When
shares of the online auction company jumped six points, he cashed out his
100-share position for a $600 profit.
Amid all that trading, Mr. Molinary says, there really isn't time to look at a
company's financial statements, let alone read Wall Street research. He knows
stocks mostly by their symbols -- FLYR, GIII, and so on -- and perhaps by a
one-sentence summary of their link to the Internet. In a bull market, that's
ample knowledge.
Many of Mr. Molinary's stock picks come from Silicon Investor
(www.techstocks.com), an online trading forum with more than 80,000
subscribers. Deep analysis is rare there; a typical 50-word posting declares,
"Online brokerage stocks are on FIRE!!" Silicon Investor's users share an
unshakable faith in the importance of the Internet. Their message boards lock
onto stock fads with the intensity of a heat-seeking missile.
In the pre-Internet world, a small-time day trader like Mr. Molinary would
have rapidly drained his account as commission charges escalated. Not now.
Online brokerage firms charge as little as $8 a trade, barely a quarter of what
traditional discount firms charge. With such rates, Mr. Molinary says, "I
don't need to worry about commissions at all."
Some of the new day traders acknowledge serious doubts about the ultimate
value of the stocks that flit in and out of their portfolios. But with news and
rumors circulating so fast on the Internet, they like trying to lead the pack.
"Everyone sees the same carrot at the same time," Mr. Molinary explains.
"There is a mad rush to get that damn carrot, even when it turns out to be an
orange hologram put up by some cyberpunk trying to unload his or her
position."
Most professional money managers, by contrast, have watched the Internet
boom with befuddlement. Mutual-fund managers at Franklin Resources Inc.
say they couldn't justify most Internet stock valuations last year, using
traditional sales and earnings yardsticks. As a result, except for some minor
plays in online advertising companies such as 24/7 Media Inc., they avoided
what turned out to be the market's hottest sector.
The Equality of Chat
"It's frustrating," says Canyon Chan, a Franklin analyst. As a stock picker at a
firm with many billions in assets, he can schedule face-to-face meetings with
Internet company executives, or confer with industry experts anytime he
wants their thinking. But with Internet stocks governed mostly by the chatter
of online investor groups, Franklin's elite privileges seem meaningless.
"Perhaps I should have spent more time in the chat groups," Mr. Chan
ruefully says.
Financial markets are hardly the first area jolted by the way the Internet
moves power into new hands. Fields ranging from medicine to the media have
been shaken by the Internet's ability to put huge amounts of up-to-the-minute
knowledge within reach of ordinary folks.
Doctors, for example, have lost their omniscience; they now must contend
with patients whose online research has made them into quasi-experts about
their diseases. The big print and broadcast empires can't single-handedly
decide what Americans should know about major issues; they must share the
limelight with thousands of online upstarts.
Until now, Internet executives have portrayed this huge diffusion of
knowledge and power as nothing but good news. "The Web follows its own
nose," says Thomas Evans, president and chief executive officer of GeoCities,
a Santa Monica, Calif., company that provides free Web pages for 3.4 million
users. "It's not like a magazine, where editors decide what readers ought to
know. Here, we've got 27 billion pages of information, on everything from
rose gardening to the best golf courses in Scotland."
But Mr. Evans isn't nearly so comfortable with the way online traders are
trampling through the stock market. Since going public in August, GeoCities
has traded as high as $51 and as low as $13, finishing the year at about $33 a
share. "Day trading is becoming pretty significant, and it's sort of
frightening," Mr. Evans says. "It suggests an ability to manipulate a stock.
People can go into chat rooms, start a rumor in the morning, and then sell in
the afternoon." He says he would welcome increased attention to these issues
by the Securities and Exchange Commission. In fact, the SEC has said it will
tighten scrutiny of online chat rooms.
Cause for Pause
Executive recruiters worry, too, that haywire stock prices will make it hard
to lure experienced managers into Internet companies. "Building up
management teams is probably the No. 1 priority of every venture capitalist
active in the Internet," says Robert Kagle, a partner in the Menlo Park, Calif.,
venture firm of Benchmark Capital. With many Internet stocks now trading at
prices that can be justified only by financial projections to the year 2003 or
later, some potential recruits say they are reluctant to join these highfliers, for
fear that whatever stock or options they get will plummet in value.
"It's a challenge," says Margaret Whitman, CEO of eBay, the online
auctioneer. "We're a rapidly growing company, and we can offer a lot of
responsibility to people." But she says she can't promise anything like eBay's
late-1998 leap, which vaulted the value of Ms. Whitman's own holdings to
more than $500 million less than a year after she came to the company.
People joining eBay now "need to understand the potential volatility of the
stock, and need to realize that our compensation packages going forward will
be more akin to a regular company," she says.
Other companies with online-commerce aspirations have an even more
fundamental problem: focusing on all the hundreds of small steps necessary to
become a reliable business. There's no shortage of public-relations agencies
willing to talk up a company's Internet potential in return for a monthly
retainer of $20,000 or more. But there's a much smaller pool of people with
true electronic-commerce savvy, and most of them are getting more calls than
they can handle.
"It takes a year to 18 months to do a really good job," says Patricia Seybold, a
Boston consultant specializing in electronic commerce. "Most of my clients
are pushing for something much faster. I tell them, "You can have something
in three months, and it can be pretty good in six months. But we still get
people who want everything right away. And that's how you end up with Web
sites that ship to the wrong address or can't keep track of inventory."
For venture capitalists, the current climate is both thrilling and alarming.
Many of the brightest entrepreneurs in America are pitching new ways to use
the Internet, spurred by the huge stock-market success so far of companies
such as Amazon and eBay. Any day of the week, a visitor to the nation's main
venture-capital corridor, Sand Hill Road in Menlo Park, can hear proposals
for companies that hope to sell photos, ginseng, wedding gifts or even funeral
notices on the Internet.
The Next Generation
But this year's start-ups aren't likely to become public companies until 2001
or later. Market conditions could change drastically by then, venture
capitalists say. The most ambitious start-ups could incur operating losses of
$50 million or more before hoping to turn profitable. If the current Internet
stock boom turns into a bust, financiers worry, that next generation of
companies may be unable to go public at all and could prove to be miserable
investments.
One of the online-investment community's leading figures, David Gardner,
says he has heard such anxieties for years and doesn't let them sway his
thinking. In a Dec. 21 dispatch to subscribers of his Motley Fool Web site
(www.fool.com), Mr. Gardner noted that his benchmark portfolio was up
170% for 1998 to date, thanks largely to Internet-oriented picks. "It is all the
rage to say that Internet stocks are insanely overpriced," he wrote. "That
herd-like conventional wisdom is exactly what enables rule-breaking fools like
us to make good money on the markets."
Mr. Gardner urged readers to stick to a buy-and-hold approach, even though
he cautioned that "we could lose 40% of our money next year."
Patience, however, hasn't generally been a hallmark of online investors. In
Boston, Mr. Molinary, the fast-paced trader, says he isn't going to let an
Internet stock slump catch him by surprise. "I'm going to focus on the
downside of the Internet in 1999," he says. "People don't like it when you sell
stocks short" -- essentially betting on a price decline. "But it can be a good
way to go." |
