"WSJ: Stocks Skid On Technology, Internet Weakness
2/9/99 23:31
By Aaron Lucchetti and Greg Ip
Staff Reporters of The Wall Street Journal
A flood of new Internet-company stock offerings is putting
a damper on the hottest stock sector in years.
Internet stocks were pounded for the second consecutive day
as individual investors and professionals alike retreated in the
face of a looming supply of new issues. The Chicago Board Options
Exchange's Internet Index fell 53.43 points, or 10.65%, to 448.26.
Since its January high, the 12-stock index has dropped 24.09%,
well into what stock analysts consider bear-market territory (decline
of 20% or more) for a stock-market sector. A separate Goldman
Sachs Internet sector of 16 Internet stocks has fared worse, losing
25.38% from its high and 8.38% yesterday alone.
Investors expressed concern on Web message boards yesterday,
but asked questions mostly about individual stocks instead of
panicking about the health of the overall market. "Is the downward
trend over . . . or . . . should I call 911?" asked a participant
to Silicon Investor's Web site about one falling Internet stock.
The immediate trigger for the retreat was the relatively disappointing
valuation for Lycos, which announced it was merging with USA Networks'
Home Shopping Network unit. Investors had bid up shares in the
Waltham, Mass., Internet-portal company in anticipation of a purchase,
but Lycos stock plunged $33, or 26%, to $94.25 yesterday on the
Nasdaq Stock Market.
The slump spread when one of the largest deals in recent Internet
history suffered amid plunging prices for the company's stock
price. Monday night, Network Solutions Inc. raised $779 million
in a secondary offering and became the largest Internet offering
on record, according to Securities Data Co. in Newark, N.J. But
the Herndon, Va., company that registers Web sites fell $23.625
on Monday on the Nasdaq, and $26.125, or 15% yesterday, to finish
at $148, or $22 below the offering price for the 4.58 million
shares sold.
The company's share price, now 39% off its 52-week high, also
was pressured by a draft proposal issued this week by a government-sanctioned
panel that would give smaller Network Solutions competitors more
access to the Internet addresses market. (Network Solutions previously
won a government contract to be the exclusive registrar of most
Internet addresses.) Nearly all of the stock in the secondary
offering was sold by the controlling shareholder, Science Applications
International Corp.
The Internet downdraft gained even more momentum when Morgan
Stanley downgraded its rating on TMP Worldwide, an advertising
and recruiting firm that offers Internet services. Analysts at
the firm reduced their rating to "outperform" from "strong buy"
in recognition that the company's shares had enjoyed a strong
run-up amid growing signs of an accelerating near-term correction
in Internet-related stocks, a company research report noted. "It
was a valuation call," said Douglas Arthur, the Morgan Stanley
analyst who follows the company. "I thought it was a good time
to step back from the stock."
Other Internet stocks were caught up in the hasty retreat.
On the Nasdaq, Yahoo! fell $17.875, or 11%, to $140.75 and now
sits 32% below its January high, while bookseller Amazon.com fell
$9.125, or 8.4%, to $100, a whopping 46% below its 52-week high.
America Online fell $11.0625, or 7%, to $147.9375 on the New York
Stock Exchange and is 16% off its 52-week high.
Another more fundamental factor may be weighing on Internet
stocks. Last year, their prices were supported by the enormous
individual investor demand being channeled into a relatively small
number of companies, each with only a thin portion of its stock
(or float) publicly available. A swarm of new issues this year
and expected in coming months, combined with lifted restrictions
on selling by company insiders at many Internet firms, suggests
investor demand is nearing the saturation point, at least temporarily.
Since the beginning of the year, nine Internet-related companies
have offered stock to the public, raising more money in about
five weeks than the last five months of 1998 combined. The year-to-date
total of $1.742 billion also eclipses the total amount raised
in 1995.
And the flood is likely to continue. Data compiled by New York
research firm CommScan indicates that 35 Internet-related companies
have filed to sell stock to the public in coming months, either
for the first time as part of an initial public offering or as
a follow-on offering. Using estimated prices for the shares, the
new stock flowing into the market would be valued at $2.058 billion,
CommScan says. The deals include expected IPOs from Web companies
Autobytel.com, iVillage Inc., OneMain.com, pcOrder.com and Healtheon
Corp., and expected secondary offerings from computer retailer
Egghead.com and Concentric Network Corp.
Recent deals such as the Network Solutions offering and a $1.25
billion convertible bond offering from Amazon.com are "sucking
up a lot of the Internet-focused capital," argues Mary Meeker,
an Internet analyst at Morgan Stanley, in a report distributed
yesterday. The size of the Amazon deal alone equalled about 35%
of the total capital raised in all Internet IPOs since mid-1995,
she says.
Many analysts expected some falloff in the Internet sector
since the stocks that sport a dotcom have been moving higher so
quickly. Certainly the spectacular gains in valuations earlier
this year attracted the attention of Wall Street underwriters
and their Internet clients.
"That's the beautiful thing about the market," said Bill Burnham,
electroniccommerce analyst at Credit Suisse First Boston. "It's
an ecosystem in many respects. If supply and demand are out of
whack, there are always investment bankers around to pour more
supply into the market. What we're going to see over the next
four months is an unprecedented amount of supply and eventually
that will satiate demand. [Then] we'll see people separate the
wheat from the chaff."
While the IPO backlog is one source of oncoming Internet supply,
another is the large amount of stock still held by "insiders"
such as founding shareholders, officers and directors. First Boston's
Mr. Burnham estimates 27% of more than 30 Internet-commerce companies
with a market value in January of $57 billion are now held by
insiders, a very large share.
Many insiders are restricted from selling during an initial
lockup period following an IPO, but as those lockups expire, insiders
become free to sell stock. That is adding to the stock available
for public investors, and could, all else equal, depress prices.
Broadcast.com's and eBay's lockups expired in January, according
to Securities Data. Broadcast.com has since seen insiders and
major shareholders (including Motorola and Intel) file to sell
1.4 million shares, while eBay has seen insiders and other restricted
shareholders file intentions to sell more than 500,000 shares,
according to First Call Investnet.
"It's another sign of people who should know what they're doing
taking now as the time to get out rather than get in," said Paul
Elliott, analyst at First Call Investnet.
---
Deborah Lohse contributed to this article.
Journal Link: Join an online discussion about Internet-stock
investing in The Wall Street Journal Interactive Edition at wsj.com
(See related article: "Dow Industrials Tumble 158.08; Nasdaq
Off 3.9%" -- WSJ Feb. 10, 1999)
(END) DOW JONES NEWS 02-09-99
11:30 PM
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