NEWS ANALYSIS : Logging Off Internet Stocks : Issues Plunge as Skepticism About Firms’ Future Grows
Internet stocks plunged Thursday after giant Microsoft Corp. unveiled new initiatives for the computer network and an analyst urged investors to sell industry favorite Netscape Communications, a rare call that signals a widening skepticism about how fast these young technology firms will grow.
Prices of Netscape, Uunet Technologies, Spyglass and other companies whose products help people maneuver through the Internet had been skyrocketing this year, largely in response to forecasts that the industry will rack up $10 billion or more in sales by decade’s end.
That might occur, and stock prices are supposed to signal investors’ expectations of the companies’ future growth. But soaring prices of Internet stocks have given many of the firms market valuations that are grossly excessive relative to their current or near-term performances.
Netscape, for instance, is expected to have sales this year of less than $80 million, yet even after Thursday’s drubbing, the company’s total stock outstanding is valued at more than $6 billion. That’s $1 billion more than the stock market values the venerable manufacturer TRW Inc., which had sales of $9.1 billion last year.
As a result, more investors are now scrutinizing how Netscape and the others will perform as stand-alone enterprises in the coming years, rather than simply embracing the rosy scenarios of the overall Internet system, analysts said.
In other words, they’re bracing for a possible shakeout among the industry’s players.
“You have to start looking at these companies individually, not just because they’re part of this Internet craze,” said Ermina Karim, assistant editor of Going Public: The IPO Reporter, a newsletter that tracks new issues.
Added Martin Pyykkonen of the investment firm Furman Selz Inc.: “The market is becoming more rational about this” industry.
Netscape’s stock plummeted 17% on Thursday, dropping $28.75 to $132.50 a share on the Nasdaq market. Uunet skidded $7.625, to $58.75 a share; Spyglass plunged $14.75, to $95.25 a share; and Netcom On-Line fell $8.75 to $54.75 a share. (For a closer look at Uunet stock activity, see Stock Watch on D8.)
If the scenario surrounding the Internet firms sounds familiar, it should. The same initial euphoria over the companies’ stocks, followed by fears of a shakeout, have occurred during the past two decades in the video game, personal computer and biotechnology sectors, to name just a few.
To be sure, skeptics for months had bad-mouthed the run-up in the Internet stocks as little more than a “speculative bubble” that would soon burst--only to have investors ignore them and keep bidding the stocks sharply higher.
But the stocks’ luster seemed to definitely dim Thursday when computer software giant Microsoft unveiled new products to increase its presence on the Internet.
Microsoft’s move placed “a question mark in front of this group,” said Kevin Baker, assistant portfolio manager for John Hancock’s Special Equities Fund. “[Microsoft Chairman Bill] Gates can drive some of these people out of the market.”
Also, Smith Barney Inc. analyst Jonathan Cohen took the highly unusual step of urging investors to sell Netscape on the same day that he began tracking the company. Analysts normally focus on finding stocks for their clients to buy, not sell, and usually they merely advise investors to “hold” stocks they find out of favor.
But Cohen wrote that while Netscape is “a legitimate competitor” in the Internet market, the company’s stock price is not “even remotely justified” by the company’s size.
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Bloomberg Business News contributed to this report.
* GIANT AWAKENS: Microsoft unveils strategic initiatives for Internet. A1
