For ‘Dot-Coms,’ More Reality Checks Loom
Despite their reputation for blindly throwing money at anything “dot-com,” Internet investors have begun to get much more rational, according to some Net-oriented mutual fund managers.
And that may be the lasting reality for the sector, even as specific niches heat up and cool down in coming years, these pros say.
Investors increasingly are losing patience with companies that show no sign--or even much inclination--to turn a profit any time soon, the managers said in a panel discussion Saturday at The Times’ Investment Strategies Conference.
Amazon.com (ticker symbol: AMZN; Monday close: $74.44), for example, announced recently that it has begun making money in its core business of online bookselling, although the company overall has yet to emerge from red ink.
At one time, “they were leaders in boasting on how much they’d lose” as they sought to boost sales, said Garrett R. Van Wagoner, head of Van Wagoner Capital Management in San Francisco and portfolio manager of its growth funds.
Now, investors are beginning to insist that Net-related firms at least show they are on a “path to profitability,” Van Wagoner said, adding that that was Amazon’s likely motivation for its somewhat unusual announcement that the book business had become profitable.
Similarly, Nicholas Capuano, manager of Trust Co. of the West’s TCW Galileo Small-Cap Growth Fund in Los Angeles, said investors are showing real discrimination between Net companies that have a sustainable business model and those that are just trying to surf the wave of Web popularity in the stock market.
“You have what were very high-profile Internet names down 60%, 70%, 80%” from their peaks, he noted, mentioning Value America (VUSA; $4.97), Beyond.com (BYND; $4.88) and Theglobe.com (TGLO; $6.38).
Alan H. Harris, co-manager of the Munder Net Net Fund in Birmingham, Mich., said the investment focus that began to develop last year on Net infrastructure stocks--i.e., builders and facilitators of Web growth rather than “pure plays” on retail commerce--is unlikely to fade soon.
He cited Juniper Networks (JNPR; $204.06), an Internet “backbone” builder; Winstar Communications (WCII; $77.25), a broadband networker; and Infospace (INSP; $200.50), a wireless content provider, as firms that can grow long-term along with the Web.
Capuano’s favorites include Interwoven (IWOV; $123) and Exodus Communications (EXDS; $117.25)--both firms that help businesses manage their Internet content and host their Web pages. Exodus is a Web host for 25 of the top 50 Net sites, Capuano said.
Van Wagoner favors another Web-hosting firm, Cobalt Networks (COBT; $113.50). He said, too, that one of 1999’s glamour stocks, JDS Uniphase (JDSU; $202.44), remains well-positioned as a supplier of advanced fiber-optics equipment, although its stock could hardly be called undervalued.
The managers declined to give specific advice on when or at what price to buy any of these stocks, but said that Net investors now must have long-term horizons--at least three years, Capuano said--and must be resigned to wild volatility even with the best stocks.
The panelists also warned against assuming that some battered Net sectors will rebound. They may be played out for good, they said.
Take online brokerages, for example. Van Wagoner said now that full-service brokers are offering online trading, many of the pure Internet brokerages likely will be forced to find merger partners.
“We are moving toward free trading and, when you’re giving your product away, it gets tough to make money” without additional businesses (such as money management) to offset trading’s lack of profitability, Van Wagoner said.
A similar story is Net superstore Buy.com (BUYX, $16.94), Harris said. “I love buying from them--I can pull out contraptions from every pocket that I’ve bought there,” he said. But he said he wouldn’t own the stock because, he said, the prices at which the firm sells are so low there is little or no profit to be had.
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Nothing But Net
Many Internet-related stocks have resurged in recent months after a pullback in mid-1999, but leading Net-stock fund managers warn that investors’ changing views of Net companies portend more volatility ahead. Monthly closes and latest for the Interactive Week index of 49 Net-related stocks:
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Monday close: 593.60
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Source: Bloomberg News
