The Electricity Came Back to Net Stocks
Internet stocks made one thing abundantly clear in the first quarter: It’s going to take more than a single sell-off--even a brutal one--to do them in.
In January, some leading Internet stocks plunged 50% or more in the type of decline that normally inflicts lasting damage on almost any other market sector.
But even as some pundits wondered whether the Internet stock “bubble” had finally burst, investors started pouring money back into many of the shares shortly after their prices stabilized in February.
By Wednesday, the 50-stock Interactive Week Net index boasted a whopping 43% first-quarter gain, after soaring 146% in 1998. Thirty-nine of the 50 rose in the quarter.
Of course, some investors incurred deep losses in the mid-quarter sell-off, demonstrating once again how risky Net stocks are. And many of the stocks remain below their January highs despite steady gains in the last six weeks.
Even some leading names were hammered. For example, Amazon.com at its worst point was down almost 58% from its January peak of $199.13. At $172.19 on Wednesday, it still was off 13.5% from its high.
Yahoo was off more than 44% at its low and is now down 24% from its peak of $222.50.
Still, the group’s dramatic turnaround showed just how enamored investors are of the Net business, with its mushrooming growth but still-scant earnings.
“The Internet is no longer a phenomenon that you can dismiss,” said Emeric McDonald, research director at Amerindo Investment Advisors in San Francisco.
Far from scaring small investors away, many seemed to view the first-quarter reversal as a good chance to “buy the dips.”
The ongoing Net stock frenzy was most evident in the initial public offering market, where stocks continued to notch fantastic opening-day gains. IVillage, MarketWatch.com and Autoweb.com all shot out of the gate in the quarter as investors jumped in, hoping to catch the next star.
But amid the shakeout in the sector overall and the subsequent rebound, some analysts say a Net-stock hierarchy is emerging.
The stocks have fallen into three distinct categories: a top tier of Internet “blue chips,” a middle rung of promising though not dominant companies and a far larger bottom layer of highly speculative names.
“There’s a real divergence of stocks that seem to go up every day and smaller Internet companies that, when they come out seem to run up initially, but eventually turn out to be poor performers,” said Peter Walker, chief executive of World Growth Capital Management in San Francisco.
At the top, America Online, Amazon.com, Yahoo, EBay and a small handful of others clearly have become the blue chips. Of course, all Internet stocks are risky and no one knows what the landscape will look like in a few years, but investors are betting that the blue chips will survive.
Like most Internet companies, Amazon.com is still unprofitable. But AOL and Yahoo have begun to turn out strong profits.
Investors “are getting into the ‘Nifty Fifty’ mentality,” said Alex Cheung, manager of the Monument Internet fund. “They expect that a big company today will keep progressing over time. It’s the ‘no-worry’ type of stocks.”
In the middle layer are such firms as Broadcom, Theglobe.com and DoubleClick, analysts say. Many in this tier have resurged with the blue chips, or at the very least have seen their shares hold tight at still-high valuations.
At the bottom are companies that have the least-promising prospects. Many have seen their stocks soar briefly over the last year with Net mania. But now investors seem to have lost interest in them.
Books-a-Million, for example, which sells books over the Net, peaked at $47 in November. It’s at $10.19 today. K-tel International, which is trying to sell recorded music over the Net, is at $8.63 today, down from a peak of $39.47.
As much more solid companies have entered the market via IPOs, investors seem less inclined to jump on the most questionable Net stocks, experts say.
The recovery in the sector overall in the quarter was helped along by several factors, McDonald said. Some big-name tech stocks, such as Lucent Technologies, had uninspiring performances, prompting investors to move money to Net stocks.
Also, professional money managers, anxious to improve their performance against the major stock indexes, put more money into Net stocks, he said.
The quarter reinforced the notion that investors are willing to buy big-name Net stocks with little or no earnings as long as they appear to be making progress. Investors don’t mind if companies plow money into advertising or otherwise spend to gain market share as long as they have improving cash flow, suggesting that they’ll eventually post solid profits, Walker said. “They’re not there to make money [yet],” he said. “They’re there to increase their cash flow.”
*
More Market Coverage
* Stock prices retreated as interest rates rose on reports of the economy’s continuing strength. C4
* The Ziff-Davis spinoff of ZDNet exemplifies Internet fever. Market Savvy, C4
* The Times’ quarterly financial report, including a review of market trends, top-rated mutual funds, investment strategies and comprehensive listings, will appear as a separate section Tuesday.
