Share this story
Close X
Switch to Desktop Site

Investors go 'Internuts' for Net stocks


John Glenn knows it, and so do Internet investors: There's nothing like riding a high G-force rocket.

Internet stocks this year have blasted off in one of the most spectacular ascents of an equity sector ever, blazing gains that range higher than 600 percent.

About these ads

But en route, the zigzag turbulence has been brutal - and it's only just begun, say sector analysts. Web-related companies helped lead the broad market in the swoon-to-boom rally from late August to late November.

The sector long ago broke through traditional stock-valuation methods. More telling, all but a handful of Internet companies have yet to turn a profit.

Understandably, then, investors are skittish. Or, some analysts say, downright foolish.

"Valuations across the Internet space have always been enormously volatile," says Tonia Pankopf, a sector analyst at Merrill Lynch in New York.

But now prices are "driven almost entirely by momentum and short-term trading considerations," she adds. In short, it's a "run and gun" sector fit for a quick buy-and-sell.

Still, there's near-universal awe over the potential for Net firms. Online retailing, for example, looks set to explode.

By 2003 the number of US households buying travel services and retail goods other than automobiles over the Web is expected to balloon more than fourfold to at least 40 million. Revenues, according to Forrester Research Inc., will surge 13 times to $108 billion.

About these ads

But big perils loom in a sector best compared to an adolescent King Kong. It changes quickly, and can become the object of intense, sometimes irrational, enthusiasm, analysts say.

Like a 400-pound primate with sudden mood swings, the sector is expected to flail about in quick shifts of technology and market conditions.

It has happened before, according to Ms. Pankopf. For a year beginning in December 1995, stock prices for most of the first-generation Internet companies slumped at least 60 percent, crushed by disappointing results from companies that provide software and connectivity to the Web.

Coming changes "will produce such a violent redistribution of equity valuations" that some investors might "abandon Web companies for some time," says Pankopf.

Yet the zeal of "Internuts" is hard to miss. Many say Internet growth will be so meteoric - a seminal event like the introduction of electricity - that jaw-dropping earnings projections several years ahead justify today's stratospheric stock prices.

"The Internet will change the world," says David Kugler, president of Monument Funds Group in Laurel, Md. "Like the steam engine," he says, "the Internet will change the way we do business."

Riding such sentiments, shares in one of the few profitable Web companies, Yahoo! Inc., recently sold for 320 times projected earnings for next year.

Another sign of mania: the sizzle in the market for initial public offerings of Web companies. During its debut day of trading on Nov. 13, shares of Inc. soared more than 600 percent. By comparison, on its opening day EarthWeb Inc. merely tripled.

Internet insiders apparently want to be among the first to bail out. Since mid-November, directors and officers at Web companies including Broadcom Corp., Excite Inc., and RealNetworks Inc. have sold or filed to sell shares in their companies at an unusually high rate, according to Disclosure Inc. of Bethesda, Md.

Investors who want to brave the turbulence should diversify, analysts say.

Four mutual funds are devoted to Internet-related companies: WWW Internet, Internet Fund, Munder NetNet, and Monument Internet Fund.

Casting a wide net is the watchword for managers of Monument Internet Fund, launched last month. The fund has invested across a full range of firms, from those that provide hardware to those that run "virtual communities."

"A long-term horizon is critical," says fund manager Alexander Cheung, "and rather than jump into hot stocks, be more rational and spread your eggs in different layers, different subsectors."

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.