TheStreet.com–a hot Internet company–is a small symbol of a large psychological journey that Americans have made on the economy. Until a few years ago, almost everyone dwelled on the economy’s shortcomings and ignored its fairly impressive record of creating jobs and lifting living standards. We have now traveled to the opposite extreme. The longer the present boom lasts, the more we throw caution and history to the wind. We begin to disbelieve that anything can go wrong.
I ran into a respected economist the other day, who made the point with a story. Almost all his economist friends, he said, think the stock market is seriously overvalued. But all lack the courage of their convictions. They haven’t sold their stock as a precaution. He himself wondered whether he should dabble in Internet stocks, whose stratospheric prices best reflect the reigning euphoria.
If he’s inclined, TheStreet.com might be a candidate. It plans to “go public”–that is, sell shares to general investors through an “initial public offering.” In some ways, TheStreet.com embodies the best of the U.S. economy. The Internet’s fabulous growth stems from the willingness of many entrepreneurs, investors and cyber-visionaries to stake their money, time, egos and careers on a wild idea that was ridiculed by stodgier types.
This culture of risk-taking was long underrated as one of the economy’s bedrock strengths. But if overdone, risk-taking can become wasteful, exploitive or delusional. The Internet mania has entered this phase, and TheStreet.com may (or may not) be a good example. It offers on-line news, information and commentary about stocks and the economy. The aim is to become a regular source of news and advice for the exploding number of on-line investors. In theory, at least, this seems a swell business.
At year-end 1997, there were 3.5 million on-line brokerage accounts, says the market research firm International Data Corp. It projects that to grow to 24 million by year-end 2002. Founded in 1996, TheStreet.com has expanded rapidly. It now has 50 reporters and editors and more than 50,000 subscribers. They typically pay $9.95 a month or $99.95 a year.
Look further, though, and clouds appear. Every company doing an IPO files a registration statement–a prospectus–with the Securities and Exchange Commission. TheStreet.com’s prospectus is hardly reassuring. In 1998, the company recorded revenues of $4.6 million and a loss of $16.3 million. The prospectus warns that the company expects “to incur net losses in 1999 and subsequent fiscal periods.”
Here, of course, is the paradox: The Internet is so far a largely profitless medium. The hope is that, as the customer base mushrooms, revenues will rise much faster than costs. Profits would then explode. But for TheStreet.com, this satisfying outcome is not preordained. One obstacle is competition. Other Web sites offer financial news and information–most for free.
Moreover, amateur investors may not need–or want–the same information as professional money managers. The belief that they do may be a creature of today’s supercharged market. The presumption seems to be that people can weave their way in and out of stocks, make a quick killing and retire prematurely. Once the stock boom subsides, people may again recognize that it’s not possible to make 20 percent on their money every year (or every afternoon) and that they can’t afford to give up their day jobs to trade stocks.
But in today’s climate, why worry? There are few ethical or economic barriers to selling stock in companies whose profits are hypothetical. People want Internet stocks; so the market supplies them.
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TheStreet.com proposes selling 5.5 million shares at about $12 a share. After expenses, this would raise almost $59 million. The prospectus says the company has no “specific expenditure plans” for the money. The main effect would be to reimburse and enrich the company’s original investors, who would still own nearly 80 percent of the shares. The temptation for new investors is that the stock’s price will soar–as many Internet shares have–and produce quick profits of 50, 100 or 200 percent.
This market hysteria is just one bit of evidence that the economy is overextended. Whatever the Internet’s future, many Internet companies will fail. Even those that flourish–and perhaps TheStreet.com will–may see stock prices crash to reflect realistic profit prospects.
Fashions rise and fall in economics. When things go poorly, hardly anyone thinks they will get better–and elaborate theories emerge to explain why. When things are going well (as they are now), hardly anyone thinks they could get worse–and elaborate theories emerge to explain why. People minimize what doesn’t fit the theories. For example, consumers are now spending more than their current incomes. This cannot continue forever.
Today’s unwarranted euphoria will ultimately suffer the fate of yesterday’s unwarranted pessimism: Time and experience will discredit it.