Another Internet index?
By Peter D. Henig
Red Herring Online
February 18, 1999
"The Internet industry has arrived," says John Fitzgibbon, veteran Wall Street analyst, upon learning that Dow Jones & Co. has established a new 40-stock Internet Index (DJII) to measure the performance of U.S. Internet stocks.
The news that the venerable Wall Street media conglomerate is breaking out the Internet sector into its own tracking and tradeable index -- the Chicago Board Options Exchange will launch an index option based on the index on February 26 under the symbol ECM -- was greeted with a mixture of glee and "it's about time" satisfaction by many Internet analysts.
"My gut feeling is it's a validation of the Internet as a category," says Derek Brown of Volpe Brown Whelan. "It's not a fad, it's a reality."
NOW TRADE THIS
Creating an Internet index is not exactly the most original concept, however.
Investment banks Morgan Stanley Dean Witter (MWD), Hambrecht & Quist (HQ), and BancBoston Robertson Stephens each have their own in-house tracking indexes for Internet stocks. Moreover, there's a virtual alphabet soup of independent Internet indexes put out by several media and research firms, including TheStreet.com's Internet Index and E-Commerce Index, Internet analyst Keith Benjamin's Kebdex and Netdex, and Steve Harmon's Internet Stock Report's Webdex and Isdex.
In fact, generating another index weighted to generate another statistic on yet another Wall Street subsector seems like the last thing flustered Internet investors need right now.
"Do we really need another index?" asks Ted Kunzog, senior editor with Internet Stock News, rhetorically. "Actually, we do ... A lot of the indexes we have right now do not truly represent the Internet sector, as some of them are simply too heavy with the large Amazons and AOLs of the world."
Mr. Kunzog, for one, feels that the composition and listing requirements for the Dow Jones Internet Index will finally offer a more balanced and accurate view of the Internet sector and its broad cross-section of players emerging in the space. The index itself will include names like Broadcast.com (BCST), ETrade Group (EGRP), eBay (EBAY), Excite (XCIT), GeoCities (GCTY), America Online (AOL), CMGI (CMGI), DoubleClick (DCLK), Exodus Communications (EXDS), Inktomi (INKT), Netscape (NSCP), Yahoo (YHOO), Spyglass (SPYG), Sterling Commerce (SE), Verio (VRIO), VeriSign (VRSN) and {IDT-Corp(IDTC)}.=inserted by me<vbg>
"It's a step in the right direction in that it's going to require companies to generate at least 50 percent of their revenues from the Internet," says Mr. Kunzog.
Excluded from the index are the shamelessly opportunistic Internet wannabes like K-Tel (KTEL), Books-a-Million (BAMM), and Zapata (ZAP), which barely generated any sales through the Net, but still claimed to be Internet companies nonetheless.
But there are concerns as well. Mr. Kunzog and others note that because listed companies will need a three-month average market cap of at least $100 million, the index could likewise become a showcase for only the larger cap stocks.
WE'VE ARRIVED
"If you think the Internet is a bubble, this index shouldn't change that," says Dana Serman, Internet analyst with Schroder & Co., sniffling out some intelligent analysis through a wicked cold. "But if you think the Internet's got some legitimacy, then this will help make it even more so."
What analysts also agree on, particularly given the weight of the Dow Jones name behind this new index, is that it may ultimately help investors, and the market, track the sector in a more measured way over the long term. That is, when people look back on this time 3 to 5 years from now, they will have an accurate benchmark of judging just how overvalued or appropriately valued these stocks really are.
Moreover, since many of the other indexes aren't widely known, the creation of a specialized Dow Jones index can only help draw attention to the sector and improve liquidity within these stocks.
"It will be an easier vehicle for institutions to invest in," says Mr. Kunzog, "and as the interest in the index picks up, I think interest in the stocks themselves will pick up as well."
Even if this new index is not considered the crowning moment for Internet legitimacy, it is at least another important milestone along the continuum of respectability.
"This is just one more in a series of events which have validated the Internet to a lot of people," agrees Mr. Brown. "Yahoo becoming profitable, Disney buying Infoseek, and AOL joining the S&P 500 were all steps along the way."
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