From Fortune Magazine
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What Meltdown? Net Stocks Are Cool
No one in his wildest dreams predicted what happened last year when Net stocks just exploded!
Andrew Serwer
All right, so those old-economy, rust-bucket stocks have been crankin', while techs and Net stocks have been slipping. As far as the latter go, a lot of folks on the Street are wondering if this is the first leg of a major selloff in Internet. What if Net stocks really are overvalued and about to crash?
While that's certainly a possibility (hey, Dan Quayle as President is a possibility!), I really don't think it's going to happen. In fact, I see Wall Street's infatuation with the Internet ending more benignly. I'll tell you why in a second, but first, a brief history of Internet time. Wall Street's first manifestation of Internet fever was less than four years ago--on Aug. 9, 1995, to be exact, the day Netscape went public. I remember the sound, the fury, the hype, as the stock opened at $28 and flew to more than $70. Netscape, though, turned out to be a false start. Despite its early splash, Netscape soon began a long swoon.
In 1996--still the Internet Dark Ages--Goldman Sachs took Yahoo public. Rival bankers thought it was a joke (see Street Life, March 1), but the catcalls ended PDQ when it became clear that Yahoo's stock "worked," as they say on the Street. (Meaning it went up. And up. And up.) The next year, Amazon went public. Meanwhile, the number of America Online subscribers kept climbing, and it began to move. To Wall Street, the Net was starting to smell like money.
Still, no one in his wildest dreams predicted what happened last year when Net stocks just exploded! How big was it? This big: Over the past 12 months or so--even with the recent pullback!--the Internet blue chips (i.e., companies like AOL, Amazon, Yahoo, and E*Trade) are up almost ten times.
Why did Internet stocks take off last year? Some say surging online shopping and trading numbers were the catalyst. Me? I think it was just institutional investors realizing they had to be in those stocks. There are now two kinds of stocks: Internets and everything else.
Where does that leave us? Well, for one thing, I say that even with the recent pop by cyclical stocks, some big Internets have staying power. Two, the market for Internet IPOs will remain on broil. And three, to keep up with the Internet feeding frenzy, more traditional companies will scramble to transform themselves. Take a look at the list of most actively traded stocks, and you'll see that some have already made that transition. Dell, for instance, sells hundreds of millions of dollars of PCs over the Net. MCI WorldCom carries huge amounts of Internet traffic over its network. Federal Express ships zillions of packages ordered online. Sovereign Bancorp announced an online strategy, sending its stock northward. And so on.
Some people wring their hands and moan that the end is near for Internet mania. I'm not going to do that. If the Internet is a revolution, well then, how do you put a value on it? Sure, Internet stock prices are crazy, but how crazy? Nobody knows.
So what will become of Wall Street's Internet infatuation? Instead of crashing, I think the hypervaluations will fade gradually as the Internet becomes so commonplace that Net companies lose their uniqueness. Here's why: Wall Street's Internet obsession is really just a supply-and-demand imbalance. There has been more demand for Net stocks than there has been supply, which has given those shares great value. But as more Internet companies go public and then issue stock in secondary offerings, and--most significant--as more traditional companies incorporate the Net into their businesses, the designation "Internet stock" will loose its panache and eventually, perhaps, its meaning. At some point, maybe sooner than we think, all stocks will be Internet stocks.
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