rticle 20 of 200
News And Features; News Review
NET FEVER
Brian Hale
01/16/99
Sydney Morning Herald
Page 40
Copyright of John Fairfax Group Pty Ltd
The arrival of electronic broking has fuelled a passion for shares in Internet
companies that defies all the rules of investment, reports BRIAN HALE.
THE WORLD is running out of words to describe the madness for Internet
companies' shares that has infected American investors.
Frenzy, mania and bubble had all been used countless times over the past few
years before the latest fever. Now those words seem inadequate.
So do comparisons with past outbreaks of investment craziness, from the
Dutch tulip-bulb mania of the 17th century to the South Sea Bubble in the
19th century and more recent manias for canal, automotive or biotechnology
companies.
The Internet is a section of the share market that makes a mockery of all
fundamental measures of valuation and investment. Only a handful of the
hundreds of Internet- related shares quoted on the US share market ever turn
a profit, so valuations cannot be based on earnings (forget dividends), and
most have tangible assets that are worth only a fraction of the value assigned
to them when the numbers of shares they have issued is multiplied by their
share price to calculate their market capitalisation.
But still their share prices soar, producing results that seem to be a mockery
of all the basic tenets of capitalism, let alone investment.
A year ago the experts were astounded that the rising share price of
Amazon .com - a discount book retailer which sells over the Internet - had
lifted its market capitalisation to the point where it was two-thirds the size of
Barnes & Noble, the giant US bookshop chain that had become the "category
killer" across the nation after building chains of stores that had ended the
existence of countless smaller chains or independent bookshops and earned
large profits.
By May, the still-to-earn-a-profit Amazon .com had overtaken Barnes &
Noble's $US2.3 billion ($3.6 billion) market value. A few months later it
was worth more than the combined value of both Barnes & Noble and its
main competitor, Borders.
Now, after its share price has risen from under $US9 to a high of $US199, it
is worth more than the entire US bookselling industry, and with a market
capitalisation of $US29 billion is even worth more than the retailing giant
Sears and Wall Street's largest securities broker and investment bank, the
global Merrill Lynch.
Amazon .com's share price has dipped in recent days in line with the rest of
the US share market, but the first response to a warning from the company
that its losses would grow as it bought ever- increasing turnover with deep
discounts was a rise of 15 per cent in the shares.
Barnes & Noble, meanwhile, keeps running plaintive full-page
advertisements pointing out that its online Internet subsidiary stocks and sells
far more books than Amazon .com, but investors don't seem to care.
Nor do they care that the scale, scope, size and profits of Merrill Lynch
dwarf those of Charles Schwab, the largest of the e-brokers that deal with
their customers online via their personal computers. Schwab is also being
valued by the market as worth more than Merrill Lynch just as America
Online, the nation's largest Internet service provider, is valued higher than
the huge Disney company and is worth twice the market value of American
Express and Eastman Kodak.
Then there is Yahoo, a Worldwide Web browser operator-turned Web
gateway. It does make profits - $US18.5 million or 16c a share in the last
quarter of 1998. Not much in the American corporate scheme of things but
enough to lift its share price by $US72 (21 per cent) when the result was
announced last week, although it dropped back from $US445 a share after a
little profit-taking.
Still, it is a hefty rise for a share that could be bought for $US29 not that
long ago - hefty enough to make Yahoo worth $US40 billion, more than
Boeing, the world's largest aerospace company, and twice as much as
Caterpillar, the world's dominant maker of heavy equipment.
Amazon .com, Schwab and Yahoo are all valued at far more than the
biggest Australian companies such as News Corp, National Australia Bank
and Westpac. America Online's market capitalisation is larger than the
combined value of our two largest companies, News Corp and NAB.
Not that 1,300 per cent rises in share prices are the province only of the
companies that pass for "blue chips" in the Internet sector. Internet fever has
spawned scores of public floats and turned hundreds of company promoters
into millionaires, even billionaires, over the past few years.
The record books have all been rewritten by Internet companies, particularly
the records for the first days of public floats.
When Broadcast.com floated in the middle of last year it was originally
priced at $US12, went to the public at $US24, listed at more than $US60, ran
up to $US74 and closed at $US62.75 on day one - a one-day gain of some
250 per cent. It has since gone as high as $US289 - giving the company a
market cap bigger than Foster's, Woolworths or Brambles. Not bad for a
three-year-old company with meagre turnover and losses of $US12.5 million
from offering radio and TV programs via the Internet.
Then there are EarthWeb, a tiny Web-design information provider, whose
share price showed a 250 per cent first-day gain to $US48 - followed by
$US69 the next day on its way to $US85 (before falling back to $US40
recently); Theglobe.com, which easily stole the record for a first-day rise
with an 850 per cent rocket-shot from its $US9 issue price to $US97 before
easing back to close at $US63.50 . . . a mere 605 per cent gain (it's now back
at $US37.50); and the Internet auction house eBay.
It floated at $US18 a share in September, has since climbed to $US321 a
share and even though it has fallen back to $US215 is still valued by the
market at four or five times the value of Sotheby's, the long-standing real
world auction house.
The list of companies could go on and on . . . and so could the hype. Many of
the arguments for the Internet are indisputable: it is changing business and
society and online shopping has taken off. Sales via the Internet in the US
during the just-completed Thanksgiving to Christmas shopping spree are
estimated to have been about $US5 billion - twice earlier estimates and four
times the previous year's sales, although still less than 1 per cent of total US
retail sales for the year.
But that is not really why the Internet bubble is there.
The truth is that it has become the most popular form of gambling. Most of
the trading is by individuals using, appropriately, electronic brokers. Few
hold the shares for long. Some trade all day long. Total trading volume in
some Internet stocks often far exceeds the number of shares on issue.
In short, the low costs of Internet broking have turned hundreds of thousands
of people into day-traders involved in a hectic pass-the-parcel game in which
the object is to unwrap a profit and pass the parcel before the music stops.
Many players are using borrowed money, and the electronic brokerage firms
have introduced special requirements in an attempt to control the frenzy that
builds as punters hype each other in the countless Internet chat rooms
devoted to the bubble stocks.
Everyone knows the bubble will burst one day, but they all think they can
make terrific profits in the meantime . . . and be out of the way when it all
comes crashing down. |
