what happens to bii on Monday if the nasdaq takes a hit. perhaps it is better to sell and wait and see what happens monday?
Technology News
When Internet bell rings, will
lifeboats be ready?
More Technology News
By PIERRE BELEC
Reuters News
NEW YORK (Reuters) - Investors are still loading up on
the money-making machine called "The Internet," expecting
that a bell will ring telling them it's time to race to the
lifeboats.
The experts believe the tide may be turning against Internet
stocks, which have been soaring for the last four years.
A study by a money managing firm shows that most of the
top 10 Internet stocks are priced out of this world.
According to Dreman Value Management LLC, the large
online auction house eBay Inc. is worth just $6 a share
compared with its current price of $187, which has been
inflated by optimistic expectations of the company's future
earnings.
This week, Wall Street was reminded what could happen
if the trendy stocks were ever caught in a severe downdraft.
The 40-stock Dow Jones Internet Index on Monday
collapsed 19 percent, dragging the Internet-laced Nasdaq
Composite index to its second-worst point loss ever, a bone
rattling 138-point drop.
All of the Internet darlings were on the hit list, with
America Online plunging $27 and Yahoo! tumbling $26.
Internet-related companies in financial services also took a
beating. E*Trade Group sank $19 and broker Charles
Schwab, the biggest U.S. online broker, slumped $13.
But the Internets again showed they have a knack for
creating inspirational rallies at low ebb. By the next day, the
stocks were coming back in grand style.
Wall Street has become accustomed to the sector's
craziness.
The average share of Internet stock that has come to
market this year has rocketed more than 200 percent --
compared with a gain of just 2 percent for initial public
offerings of stocks that are not in the Internet category,
according to Renaissance Capital Corp., an IPO firm.
David Dreman, head of Jersey City, N.J.-based Dreman
Value Management, which handles $7 billion of assets, said
his study found that Internet stocks are simply an
extraordinarily big bubble.
America Online, eBay, Yahoo!, Qwest Communications,
Excite, Lycos, E*Trade, AmeriTrade, Amazon.com and
Cisco Systems all went under the microscope in Dreman's
analysis. But only Amazon.com and Cisco were judged to
be close to reality.
Dreman said the difficulty in projecting the future of
Internet companies is that many still do not have any
earnings. The analysis got around that problem by relying on
analysts' forecasts of what the companies could earn in their
first year of profitability.
The analysis then projected a large 50 percent earnings
growth for the companies in the first three years, followed by
a 25 percent rise for the next five years, 20 percent for
sixyears, 15 percent for seven years and a 7.5 percent
income growth thereafter.
The results were mind boggling.
eBay, which has an incredible forward-looking
price/earnings ratio of 8,600, was worth only $6 a share,
compared with its current level of $187.
Yahoo! was given a theoretical value of $31 versus $189;
America Online, $38 against $147; Qwest Communications
$25 versus $92; Excite $54 compared with $152; Lycos
$34 against $100; E*Trade Group $25 versus $104;
AmeriTrade $36 versus the current level of $127.
Wall Street had reasonable expectations only for
Amazon.com, which was calculated to be worth $103
versus its current level of $200, and Cisco, pegged at $118
versus $113.
"Any Internet companies would say that we're crazy and
they'll earn much, much more, because, after all, this is a
'New World,'" Dreman said. "But people have said the same
thing about other speculative bubbles."
Adding to the bullish excitement for the Internet sector are
the estimated 7.5 million day traders.
"This has created problems not only for the stock market
but for the day traders themselves, who suffer from a
gambling problem," Dreman said.
"It's gotten so bad, that New Jersey has opened treatment
centers for day traders with gambling addictions, just like
they have places for people with casino gambling problems."
William Valentine, investment manager at Valentine
Ventures LLC said that the higher the Internet stocks rise,
the more investors love the companies and the greater the
demand for the shares.
"No one wants to miss out on the rally," he said. "And the
people who have not owned any of the stocks eventually get
pulled into the market, thus creating a constantly expanding
demand that Wall Street can't keep up with. "
The biggest problem investors face is in figuring out which
companies have the most potential. There is no model that
would show, historically, which companies will end up to be
winners or losers.
"There's not a lot of discrimination yet for Internet stocks
and, as a result, the institutional investors are scrambling to
get up the learning curve and they're buying chunks out of all
of these companies," Valentine said.
When the "Big Correction" comes, however, people
should not expect the Internet bubble to just burst.
"The bubble is more likely to deflate than burst because it
will take time to bring the values of these stocks to what is
reality," Valentine said.
Today's biggest names -- America Online, Amazon.com
and Yahoo! -- will become powerhouses in the business, he
said.
What will happen after the Internet shakeout?
"The blue-chip Internet (stocks) will gravitate toward more
normal valuations, albeit high valuations," Valentine said. "A
whole bunch of secondary companies -- niche-oriented
types that are trading 80 to 90 percent premium to what
they are worth -- will suffer a more rapid sell-off."
And, a third tier of Internets will become virtually
worthless.
"That group, which is the vast majority of the Internet
companies, will be consolidated and eaten up by the
secondary stocks and blue-chip names, and they will
essentially disappear," Valentine said.
Ironically, the companies in the third tier are the companies
that Wall Street is advertising as the latest Internet hot
stocks.
"They are the stocks that are coming to market right now
and the Street is saying 'Hurry up, hurry up, the sun is up
and the end of the day is coming,'" Valentine said.
"What's scary is that one-quarter of the Internet-related
companies that are in the IPO pipeline are not only
companies that have no earnings but they also don't have
any revenues," he said.
Indeed, investors may just be buying a promise and a
vision. |
