At this time last year, Net skeptics whined a common refrain: Internet-related stocks are overvalued.
Now note how the cry has changed. Everyone knows Net stocks are overvalued. For example, eBay Inc. at $12 billion in market capitalization is worth 50 percent more than Kmart Corp. All anyone wants to know at this point is what will cause the inevitable crack.
Here are some of the possibilities:
– Supply equals demand. A popular story line has been that when insiders start selling stock in the companies that have had the hottest initial public offerings, average investors will wake up to the fact that there’s no there there and valuations will drop.
This argument may be wrong-headed for two reasons. First, because demand for Internet stocks currently far exceeds the supply, sales by insiders merely may begin to sate the desire of outsiders.
Much has been made of the role played by small-time investors in driving up Internet stocks. But now institutions like mutual funds need to own the shares too because to not own Internet-related stocks is to miss out on the rising tide.
“Institutions are kicking themselves,” says Kenneth Goldman, chief financial officer of @Home Corp. “There’s no question they are underrepresented.”
The point is that as long as value is in the eye of the investor, supply and demand might not come into balance, even with individual share counts growing appreciably.
– The wonder years end. Investing in Internet stocks is like riding a fast merry-go-round. Jumping off intact will be tricky. And we’ve seen that the signal won’t be something like a service shutdown (been there, done that) or widening losses. Rather it will be a significant disappointment by a major Net concern.
“The fundamental issue is if a major Internet leader misses its numbers,” says venture capitalist James W. Breyer of Accel Partners in Palo Alto, Calif. “Until one of them does, we will see continued volatility, particularly in the upward direction.”
Remember, though, that companies play a major role in massaging their own numbers. But as second- and third-quarter earnings are announced and companies begin to forecast their performance in 2000, investors will look for slowing growth rates, competition and anything that smells of poor execution.
– Beats me. And them. Perhaps the most honest thinking on Internet stocks is by people who acknowledge they haven’t got a clue.
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“No one truly understands what will be the factors that weave around these stocks and drive them higher or lower,” says Breyer.