Noted Analyst Sees Net Stock Shakeout

One of Wall Street’s most closely watched Internet bulls said Friday that stocks in the category are “fantastically expensive” and warned that a shakeout is likely.

Merrill Lynch & Co. analyst Henry Blodget, who late last year predicted the astonishing stock surge of Amazon.com and others, said in an interview that “we are probably nearing the end of a cycle” in Net stocks. “We are moving out of the period of low-hanging fruit.”

Blodget reiterated his earlier prediction that 75% of Internet companies will fail or be purchased, and he added that many stocks could fall 75% from current levels and “still be expensive.”

Speaking earlier to hundreds of Net professionals at a conference sponsored by Industry Standard magazine, Blodget acknowledged that Internet stocks have risen so high because investors recognize the legitimate historic change in the economy. But he said investors have shifted money to Web companies without regard to the valuations those stocks are commanding, which have also been driven up by the sheer scarcity of the stocks.

Blodget rejected the argument that Internet efficiencies will lead to new ways of valuing stocks in the long term, saying that most stocks of surviving Net companies will eventually be valued within historical norms, relative to earnings.

He said his outlook has changed little in the last two months, but that in that time the number of initial public offerings of Internet stocks scheduled for the next three months has swelled to 150. He said that will double the number of Internet companies available to investors, forcing prices down.

Blodget said even Yahoo, one of the few profitable Internet companies, is priced according to the best projections for its earnings five years from now, making the shares “expensive, but not insane.”

He said most people should avoid investing in Internet stocks; that those who do invest should only put 5% to 10% of their portfolio in those stocks; and that even that money should be spread among 10 to 20 best-positioned companies.

“Investors are far too aggressive,” Blodget said.

His comments, after the close of regular trading, came a week after Microsoft President Steve Ballmer called technology stock prices absurd, prompting a sell-off.