America Online's strong quarterly earnings are a sign that the company's business is humming along. Too bad the same can't be said of its stock--or those of other leading Internet companies.
Despite blistering revenue growth, shares of the big three Net firms--AOL, Yahoo and Amazon.com--have been mired in trading ranges since spring and lately are exhibiting troubling "technical" signs.
On a fundamental level, the problem may be that the impressive financial results simply didn't meet the high hopes of some investors. Profits reported by AOL on Wednesday and by Yahoo two weeks ago topped Wall Street estimates and satisfied so-called whisper numbers. But that was little consolation to the stocks, which promptly fell.
The stocks are suffering because "the law of large numbers is beginning to take hold," said David Simons, managing director of Digital Video Investments, an institutional research firm in New York.
Their former hyper-growth in such categories as revenue, page views and subscriber counts has slowed to merely superb growth, he said. Compared with the triple-digit growth of smaller Internet companies recently going public, the numbers seem tepid.
"This explains why Internet IPOs have done so well while Internet stocks overall have been lagging the general market," Simons said.
Technically, the picture is not encouraging, some analysts say. (Technical analysis is the study of price and volume patterns on stock charts. Many investors feel charts yield important clues about a stock's direction.)
Specifically, the three stocks are again falling near so-called support levels. A support level is a price at which a stock has stabilized in the past and below which it is unlikely to fall. Support occurs when a stock dips to a point at which investors think it is cheap and step in to buy.
Yahoo's support, for example, comes in around $125. The stock closed Thursday at $145.13, down $6.75.
Yahoo has already touched its support level five times this year.
In one sense, it's encouraging that the support line has held and the stock has rebounded. But each time a stock falls to a support level, the greater the odds are that it will fall below it. Eventually, the number of buyers willing to support the stock at that price wears thin.
"Repeated assaults on support tend to lead to lower prices," said John Bollinger, a well-known technical analyst and president of EquityTrader.com. "Each time you go down, you use up a little bit of that support."
Another worrisome technical sign: The 50- and 200-day moving averages of the three stocks are converging.
These lines are the average of a stock's closing prices over a certain period. The averages are "moving" because a new price is added each day while the oldest one is dropped. A 50-day line is considered a barometer of short-term performance and the 200-day measures longer-term action.
Recently, the 50-day lines of Amazon.com and Yahoo have threatened to drop below the 200-day averages--usually a bad sign. The weakest stock technically is Amazon.com, which skidded $18.25 on Thursday to $107.19 after reporting a large quarterly loss late Wednesday.
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Amazon: Fighting the Current?
Amazon.com's share price has weakened "technically" Thursday, falling below its 200-day moving average. Daily price moves and latest, with 50-and 200-day moving averages:
Thursday: $107.19, down $18.25
Source: Bridge Information Systems