As Net Stocks Fall, Bottom Is Uncertain
By Jerry Knight
Washington Post Staff Writer
Friday, May 28, 1999; Page E1
Just seven weeks ago, when Internet stocks were Wall Street's favorite
investment, America Online Inc. Chairman Steve Case owned shares in
his company worth roughly $636 million.
Today, Case is $195 million poorer, because investors are bailing out of
Internet issues, sending them into a skid that has cost investors billions of
dollars and shows no sign of slowing.
Falling from $167.50 a share to $116, AOL's stock has lost one-third of
its value since April 6. Stocks of other well-known Internet companies,
such as Amazon.com Inc. and eBay Inc., are off 25 percent to 50 percent
and are continuing to drop.
As Net stocks keep falling, investors are struggling to answer two
obvious, though vexing, questions: Is this just another temporary slump
that will be followed, as other slumps have been, by a quick rebound? Or
are the stocks down for the count, signaling an end to the Net stock mania
that drove prices to what many considered irrational heights.
"I think it's too early to say it's more than just a normal corrective process.
I don't think that anyone has given up on the Internet as an investment
vehicle," said D. Keith Mullins, a strategist for Salomon Smith Barney Inc.
And most analysts have yet to pinpoint the cause of the Internet stock
slump -- other than prices being too high. Nor have they identified factors
that would trigger a rebound.
Yesterday most Internet stocks slipped again. AOL shares dropped more
than $4, to $116. Amazon.com, the online bookseller, lost more than $6,
closing at $114.56 1/4 -- down sharply from a peak of $221 a few weeks
ago.
Among local Internet issues, shares of Network Solutions Inc., the
Internet domain-registry service in Herndon whose shares had peaked at
$153.75, fell an additional $1, to $59.75. Value America Inc., the
electronic retailer based in Charlottesville, fell almost $1, to $17.93 3/4 --
from a peak of $74.25. Telebank Financial Corp., an Internet bank based
in Arlington, lost $4.25 to close at $62.25, well off its high of $151.75.
Mullins and other Wall Street analysts have been warning investors that
the fundamentals of most Internet companies do not justify their high
prices.
Even some professional money managers who agree that Internet stocks
were overpriced have been buying them anyway, because they didn't want
to miss out on the boom, Mullins said. Those investors "simply decided to
commit intellectual suicide regarding the group's valuations," Mullins said in
a recent message to his firm's clients.
Analysts offer radically different predictions of where Net stocks will head
next.
Noting that tech stocks suffered summer slumps last year and the year
before, Mary Meeker of Morgan Stanley Dean Witter & Co. warned the
firm's brokers and traders earlier this week that Internet issues could well
drop another 20 percent.
But Keith Benjamin of BancBoston Robertson Stephens said yesterday
that "most stocks have already fallen as much as we've seen in previous"
slumps, so the bottom may be near.
"Many investors appear to have given up after recent declines,
demonstrating capitulation that typically defines the bottom" Benjamin
said. "We believe we are close enough to start to be more aggressive" in
buying Internet stocks.
Benjamin's widely read e-mail newsletter on Internet stocks, which
typically is published on Friday, was issued a day early this week because,
he said, the stocks "are at an important inflection point" and could rebound
"sooner than the majority expects."
Temporary downturns are nothing new for Internet stocks. AOL, which
early last summer traded as high as $35 -- adjusted for splits -- dropped
to about $20 in August and didn't hit $30 again until late October. But
then it took off and even after losing one-third of its value in the last few
weeks, the stock is still up 462 percent from a year ago, meaning
Chairman Case is still way ahead for the year.
Amazon.com shares are still up 700 percent from a year ago. Network
Solutions remains 210 percent ahead of last year, and Telebank stock is
worth more than 520 percent more than a year earlier.
Putting the recent decline in that perspective not only makes it hard to
evoke sympathy for stockholders of Internet companies but also
undercuts arguments that Net stocks should rebound quickly.
Benjamin, who has advocated buying Net stocks when they slump, said
he is "tempted" to buy AOL because of his faith in the future of the
company. But he said he remains "challenged to see near-term strategic
catalysts" that would trigger a rebound.
But most analysts are reluctant to proclaim that a fundamental change has
occurred in the way the market values Net stocks.
"There will come a time, I don't know when, when Internet stocks will
stay down for more than a week or two," said David Simons of Digital
Video Investments in New York. "It's when you get that long funk that
people will begin to think more deeply."
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