To all - NYT article about Internet stocks.
January 23, 1999
Internet Stocks Falter, Causing Wider Worries
By EDWARD WYATT and DAVID BARBOZA
George Nichols, a 22-year-old management major at the Georgia
Institute of Technology, put more than $1,500 of his student loan
money in a mutual fund investing exclusively in high-flying Internet
stocks.
Shalin Madan, 23, left his job as an accountant at State Street Bank in San
Francisco to become a full-time "day trader," moving his money frantically in
and out of stocks like America Online, Amazon.com and Yahoo, often every
few minutes.
Jill McKinney, a 27-year-old employee
of Silicon Investor, an Internet site
devoted to technology stocks, recently
got an excited recommendation from a
taxi driver in Seattle to invest in
Broadcast.com.
As such delirium has spread, Internet
stocks have soared. Shares of newly
public companies like Marketwatch.com
and Theglobe.com have risen threefold
or fourfold in a day; more established
companies like Yahoo or Amazon.com
have more than doubled in the last three
months. Marketwatch.com now sports
a market value of nearly $950 million --
bigger than such established companies
as Reebok, Polaroid and Tupperware.
But this week, a bit of the air leaked out
of what many Wall Street pros call the
Internet bubble, with some high fliers,
like Amazon and America Online, falling sharply from recent highs. And while
most of the stocks are still ahead for the year, many analysts are warning of a
steep decline that could rattle the wider market.
That is because Internet fever has spread in recent months to technology
companies and an even broader swath of the market. And it leaves investors
in 401(k) plans and mutual funds who have not bought into companies with
dot.com after their names increasingly vulnerable.
The latest warning about an Internet selloff comes from Barton Biggs, a
Morgan Stanley strategist, who has been bearish on the market for some time.
"I promise you, like all bubbles, this bubble will come to a very bad end," he
said on Thursday.
If it does, it is not just Amazon and Broadcast that will suffer. Pension and
fund managers who are worried about the high prices of Internet stocks or
who are having trouble buying large stakes in these small companies have
driven up the stock prices of companies like Cisco Systems, which builds
equipment that connects computers to the Internet, and Oracle, whose
database software is used by many online retailers.
Even more cautious fund managers have turned to companies like Walt
Disney, CBS and Sotheby's that have only the most tangential connections to
the Internet. When Disney unveiled its Internet joint venture, Go Network,
earlier this month, investors bid up Disney's market value by $5.6 billion.
While valuations of Internet stocks remain in the stratosphere, those of
technology stocks have doubled in the last three months. And those of broad
market indicators like the Standard & Poor's 500-stock index have leapt by 50
percent.
The prices of Internet stocks have risen so high so fast that even analysts
enthusiastic about the Internet's long-term effect on the economy have
warned that prices in the entire sector are likely to fall more than 50 percent.
A sharp, widespread decline would cause headaches for regulators and could
cause problems for many on-line investors, who dominate the trading in many
Internet stocks. Already, a group of senior officials from several big Nasdaq
trading firms has met to discuss recent volatility among the Internet stocks,
virtually all of which trade on the Nasdaq stock market.
Several brokerage firms have acted to squelch speculative trading by
restricting online transactions. Among other things, they have made it more
difficult to borrow to buy Internet stocks and put certain limitations on initial
public offerings.
But all this has done little to damp the enthusiasm of investors like Madan,
whose passion is simply an extension of a love of all things digital.
"It's a gold mine," Madan said. "The Internet stocks are the epitome of the
'90s. They're a reflection of what is going on in the stock market. It's just
more extreme."
Last week's initial public offering of Marketwatch.com, which provides
financial data to Internet sites, was one of the hottest ever. The shares were
initially offered to select investors at $17, but public trading opened on Jan. 15
at $90. The stock finished the first day at $97.50 but has since fallen to
$80.50. That means most investors who bought after trading began have
suffered losses, as have recent arrivals to most Internet stocks.
Like Marketwatch, nearly every Internet company sports an outsized
valuation. America Online is worth more than half the companies in the Dow
Jones industrial average. Yahoo is valued higher than Eastman Kodak. And the
market value of Amazon.com exceeds the combined value of Barnes & Noble,
Nordstrom and Federated Department Stores.
Richard Hoey, chief economist at Dreyfus Corp., recalls that a similar frenzy
for computer stocks emerged in the summer of 1983, about the time the
personal computer was introduced. But few of the favorites then -- like Prime
Computer and Coleco -- are around today.
"The enthusiasm over the growth of technology as an industry was very well
founded," Hoey said. "But we learned that today's hot stock is not necessarily
a long-term winner."
Judging by market values, though, few Internet stock prices reflect the
possibility of failure. Consider Broadcast.com, which offers audio and video
from 345 radio stations and 17 television stations, as well as its own
coverage, over the Internet. The company has a market value of $2.33 billion.
That amounts to $9.3 million for each of its 250 employees -- a Wall Street
benchmark for valuing Internet companies, which rarely have earnings and
sometimes not even revenues. By that measure, Broadcast.com's value is
more than 15 times the $600,000 per employee at Infinity Broadcasting,
which operates 160 radio stations in the United States and sells billboard space
here and abroad.
Other Internet companies have the same huge multiples. Yahoo is worth $35
million per employee, and eBay, an Internet auction site, $61 million. That
compares with $14 million at Microsoft and $5 million at Coca-Cola.
And while companies like Coca-Cola, Microsoft and Infinity earn millions of
dollars each quarter, most Internet companies are years away from profits.
Broadcast.com, for example, lost $10.5 million on revenues of just $11.4
million in the first nine months of last year.
Even some who are certain the Internet will bring about fundamental changes
in the economy say there is no sense to the huge valuations.
"The Internet is making huge changes in how we live our daily lives," said
Lise Buyer, an analyst who follows Internet companies at Credit Suisse First
Boston. "But there is no way to correlate what is happening with these stocks
to the underlying businesses. What we have is a mania."
The recent Internet frenzy has come in two phases. The first began on Oct.
8, after stock prices had fallen sharply on worries about the turmoil in
emerging markets.
When the Federal Reserve cut interest rates three times in a matter of weeks,
investors began to believe the U.S. economy could withstand any pressure. At
about the same time, technology bellwethers Intel and Microsoft reported
robust earnings and said they expected profits to continue to grow.
"All that got technology stocks going, and they kept going," said Charles
Morris, manager of the T. Rowe Price Science and Technology Fund.
Morris said he has little doubt that the
madness swept up stocks like Cisco and
Oracle. "Everyone got caught up in the
Internet excitement, and that has
dragged along all of the technology
stocks associated with it," he said.
Internet stocks shifted into overdrive on
Dec. 16, when a little-known Wall Street
analyst, Henry Blodget, stirred investors'
speculative juices with a seemingly
outrageous prediction.
Blodget, a 32-year-old financial analyst at CIBC Oppenheimer, forecast that
Amazon.com, whose shares were then trading for $242, would reach $400 in
12 months. They surpassed that level in early January, and the stock split.
Even though Amazon shares have since fallen, they are up 52 percent since
Blodget's report when adjusted for the split. But he, too, says Internet stocks
are ahead of themselves.
"I don't think there's a sector in history that's been valued at these heights," he
said. "It's totally frightening."
Blodget said part of the reason for the rapid climb is that there are only about
four dozen "pure play" Internet stocks, and fewer than 10 of those have
moved much beyond the planning stage.
Among the most promising are those like Yahoo, which operates an entry site,
or "portal," to the Internet. Investors hope that the services offered by portal
companies, like free e-mail and connections to shopping sites, inspire loyalty
among users, which the companies can capitalize on by selling advertising.
Other big favorites are online shopping sites like Amazon.com, which,
although unprofitable so far, hopes to capture customer loyalty as it expands.
Because many young companies have relatively few shares outstanding, big
investors like pension and mutual funds have found it hard to buy large stakes
without significantly moving share prices. Broadcast.com, for example, has
17 million shares outstanding, but until this month only 2.5 million of those
were available to be traded.
With an average of 900,000 of its shares trading each day, the price rose
exponentially, from less than $40 three months ago to $289.50 this month,
before falling back to $136.25 on Friday.
So limited is the supply of pure Internet investments, in fact, that many
institutional investors have tried to ferret out Internet opportunities among
elsewhere.
That is what caused people to bid up shares of CBS, which owned 50 percent
of Marketwatch -- a stake reduced to 38 percent in the recent public offering.
In addition, CBS owns 10 percent of Sportsline USA, which operates
sports-related Internet sites.
Shares of Donaldson Lufkin & Jenrette, a brokerage firm, rose last week after
it said it would make a public offering of shares of its online brokerage unit.
And since December, when Sotheby's made clear its intention to use the
Internet for some auctions, its shares have risen 50 percent.
The heavy trading in stocks like Broadcast.com appears to be driven by
individual investors: the average size of Internet trades is in the hundreds of
shares, far smaller than the thousands typical for companies like Microsoft or
Intel, according to Birinyi Associates, a research firm.
And those individual investors are starting to feel a bit of pain as some of the
frenzy has subsided.
"I'm worried, but I was kind of expecting this," said Nichols, who recently
graduated from Georgia Tech and took an accounting job. "But I'm in for the
long term."
Copyright 1999 The New York Times Company |
