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http://www.businessweek.com/bwdaily/dnflash/nov1999/sw91130.htm
BW ONLINE DAILY BRIEFING
STREET WISE by Amey Stone November 30, 1999
When the Net-Stock Music Ends, Will You Be Seatless?
The authors of The Internet Bubble have a warning for individual investors:
Get out now!
Yearning to embrace some hot Internet stocks? If so, you may want to
consider a cold shower. Or try the next best thing: Read The Internet
Bubble, a new book by brothers Anthony B. and Michael C. Perkins (Harper
Collins, $27). Their thesis is that Net stocks are grossly overvalued, and
that individual investors are low enough on Wall Street's food chain that
when the inevitable shakeout occurs, the little people will end up holding
the bag. By then, of course, the venture capitalists and investment bankers
who fed the frenzy will have escaped with their millions.
This is an important message now that the Internet stock boom, which cooled
last summer, is back burning brighter than ever. Net-stock trading surged to
record levels in November -- 44% more shares changed hands than in October,
according to a Nov. 29 report from Credit Suisse First Boston. Demand for
initial public offerings, which normally fades in the latter months of the
year, is still strong for eagerly anticipated Net IPOs, such as this week's
Agency.com and McAfee.com. Major market gauges are breaking records as
Internet indexes approach their all-time highs. CS First Boston's Net index
climbed 23% just in November.
2000 PULLBACK? Yet many professional investors agree with the Perkins
brothers that a shakeout is coming, possibly to be sparked by a post-holiday
letdown. "We continue to expect the stocks in the group to be strong over
the next few weeks but think it's likely that they will pull back early in
2000," Merrill Lynch analyst Henry Blodget wrote of e-commerce companies in
a Nov. 29 research note. Wit Capital analyst Jordan Rohan predicts that
companies that went public in 1998 and early 1999 but still can't show a
path to profitability will be punished by investors in the next 12 to 18
months. "How long do we have to wait?" he asks.
In fact, some Internet stocks are tanking even before the euphoria wanes.
According to CommScan, a New York research firm that tracks IPOs, some 28
Internet-related startups have fallen more than 60% from their closing
prices on their first day of trading (see "Table: Internet IPOs That Have
Fallen Furthest"). The group includes several that have been delisted from
one stock exchange or another -- plus former high-flyers such as iVillage
(IVIL), Theglobe.com (TGLO), and Thestreet.com (TSCM).
Despite such examples, the authors of The Internet Bubble argue, the
shakeout hasn't even started yet. Using simple math, they show that most
Internet stocks remain way overpriced. To justify their current prices (the
book's calculations were done in June, 1999), the average Net stock would
have to produce revenue gains of more than 80% every year for the next five
years. To put that in perspective, Microsoft grew only 53% in the first five
years after its IPO, and Dell grew only 66%. At a market cap of nearly $50
billion, Yahoo! would have to grow an average 150% annually for the next
five years to justify its valuation. "Internet stocks can't maintain these
Microsoft-on-steroids-type valuations," said Anthony Perkins in a phone
interview.
"POOL OF SUCKERS." The authors still think the Internet will be
revolutionary. As founders of Red Herring, a technology investing magazine,
their wagon is clearly hitched to the Net boom. They just think that
individuals, who don't understand the extent to which the deck is stacked
against them, may hold on to their investments for the long slide, while
investment pros who understand that the current Net stock mania is ephemeral
will get out. "Clearly, everyone on the inside is shaking their head and
saying this is the easiest money I've ever made," says Michael Perkins.
The authors liken the game to musical chairs where at some point the music
stops -- and whoever is slowest to react is left seatless. "There is broad
awareness amongst venture-capital and investment banking communities that
there is this gigantic pool of suckers out there, and they are grossly
taking advantage of them," says Anthony Perkins.
When will the music stop? Perhaps not soon, the authors concede, though they
think that overspending on holiday marketing by some dot.com retailers is
ominous. They also aren't sure whether the sell-off will come in one big
Net-stock meltdown, or occur as individual bubbles bursting one by one.
Either way, they write: "If you hold any of these stocks, it's time to
sell."
BE NIMBLE. The book doesn't recommend new regulation to protect investors --
just prudent investing in anything but Internet stocks. "If [investors] lose
their shorts, it is because they were overzealous," says Anthony Perkins.
"We're saying, don't let greed get the best of you," adds Michael. "Beyond
that, we're not prescribing solutions."
In truth, individuals who have the appetite -- and the capital -- to take
plenty of risks may be able to ride the Internet frenzy for awhile longer.
Remaining nimble is the key, says Ryan Jacob, the former manager of The
Internet Fund, who launched his new Jacob Internet Fund on Nov. 26.
Investors will need to have the foresight to shift out of flagging Internet
subsectors, he adds, and into new Web industries that seem poised for
growth. "Just when you think we must be done, a new area starts to emerge
that captures investors' interest," Jacob notes. "I think that process will
continue for a number of years. We'll go through different phases," he says.
"In those will be opportunity."
The Perkins' agree many great Internet companies have yet to be formed. But
that doesn't change their advice to investors: If you're already in, get out
while the gettin's good.
Stone is an associate editor at Business Week Online
JW
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