An interesting perspective on Internet stocks.
News from Reuters
Internet IPO Bubble Begins To Deflate
0:55 Tuesday, June 1, 1999
By Reshma Kapadia
NEW YORK (Reuters) - As Internet stocks take a beating, the initial public offering market's cyber-bubble appears to be losing steam, but investors are not yet rushing for the exit.
They are, however, becoming wiser and more selective as the cyber-bubble deflates and hits them with the realization that all Internet issues are not going to rise, said Steve Harmon, of Internet.com.
The lesson hit most investors last week as ''hot'' deals such as barnesandnoble.com and DLJdirect posted ''modest'' gains by the new standards set by the cyber-IPO craze. Some Internet IPOs even closed their first trading days below their offering prices.
Still, the deals that have a unique twist or a strong brand name are expected to be welcomed by investors, as was last week's StarMedia Networks Inc. -- albeit in a more modest fashion than other recent hot cyber deals.
Spanish-language online network StarMedia, which rose 77 percent on its debut day, continued to rise as on its second day as Internet stocks got pummeled. Its move opposite general trading demonstrated its strength, analysts said.
''We are seeing a shift in quality. If you are a smaller IPO, you may pare down the size or not increase the expected price range (prior to the pricing). If it's still a high-quality company, I think it will go forward with their deals,'' said Tom Taulli, author of ''Investing in IPOs.''
''Even though StarMedia did not have a great (take-off) by recent standards, it still turned in a nice performance so you can still get an IPO off the ground, but if you don't have that kind of quality it may break below the offering price.''
The debuts of some of last week's IPOs, including free e-mail service Juno Online Services Inc. and Internet access provider ZipLink Inc., fell below their offering prices. Pressure on Internet stocks amid unease about U.S. interest rates and concerns about valuations contributed to the lackluster IPO performances. The large number of deals popping out of the IPO pipeline also depressed some debuts.
According to Securities Data, 20 percent of the Internet IPOs in March were trading below their offering price, and 38 percent of the Internet deals in April were trading below their offering price. As of May 25, 48 percent of Internet IPOs in May were trading below their offering price, the firm said.
''The momentum will definitely slow down as supply continues to increase and performance continues to deteriorate. Unquestionably, the market will become more difficult in the coming weeks until something changes,'' said Neil Barsky, co-founder of Midtown Research.
The market's recent gyrations have taught some investors a harsh but important lesson that not every Internet stock is going to rise, said Steve Harmon of Internet.com.
This week's line-up is expected to be quieter due to Monday's Memorial Day holiday and the recent volatility.
Wit Capital Group Inc. is expected to stand out because of retail investors' familiarity with the Internet investment banking and brokerage firm, analysts said. It plans to offer 7.6 million shares in an expected price range of $7.00 to $9.00 through lead underwriter Bear Stearns.
''It is one of the most compelling retail use of the Internet right now. It happens to be a very good business and it is perfectly tailored for the Internet and plays into all the strengths of the Internet, which is why (the deal) is going to be hot,'' said Randall Roth, an analyst at Renaissance Capital's IPO Plus Aftermarket Fund
Online brokerage users are more likely to stick with an e-brokerage firm because it is not easier to move accounts, which will work to Wit's advantage, Roth added.
''Other sites may be sticky, but these (online brokers) are more like Velcro,'' Roth said. ''The reason e-brokers are doing well is because they are getting customers and maintaining customers.''
Internet broker DLJdirect, a tracking stock for investment bank Donaldson, Lufkin & Jenrette's Internet brokerage unit, had a modest reception on its first day after its IPO last week, climbing 50 percent. However, investors came back the next day and extended gains.
Wit, which is in its nascent stages, has its share of obstacles ahead of it, especially because it is in a capital-intensive business. To lead large deals, they need to have a lot of capital and good distribution channels, which also takes money. If Internet stocks tumble, Wit may become vulnerable, analysts added.
In recent weeks, telecommunications IPOs have performed fairly well, which might help Network Access Solutions' offering of 7.5 million shares in a range of $14 to $16 through lead underwriter Donaldson, Lufkin & Jenrette.
Upscale toy retailer Zany Brainy, which plans to offer 6.1 million shares in a range of $10 to $12, according to lead underwriter Donaldson Lufkin & Jenrette, may also pique some interest because it is something a little different, analysts said.
Internet data security product reseller Litronic Inc. and Internet consulting firm iXL Enterprises are also slated to go public this week.
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