Investors Reassess: ‘Dot-Coms’ or Power Plants?
If the Internet-stock mania is history, it’s going to be news to Walter Buckley.
The chief executive of Internet Capital Group, a Wayne, Pa.-based firm that incubates developing Net-related firms, Buckley last week confidently told a conference in Minneapolis that he’s got 21 initial public offerings to offer investors just as soon as “this market returns.”
Yet his own stock, at $32 as of Friday, seems to be signaling that a return to Net stocks’ glory days would not appear imminent. The share price has bounced up from a low of $24 in May, but it’s still 85% below its peak price of $212 reached in January.
The journalistic practice of citing a stock’s peak price for reference purposes makes for dramatic comparisons in the Internet sector these days, of course. The final surge of Net stocks early this year, before the spring crash, lifted many shares two-, three- or even fourfold in a matter of a few weeks.
But the number of people who actually paid those prices and still own the stocks may be relatively small, assuming many of those buyers were short-term traders who were only playing the game until the game was no more.
Nonetheless, plenty of people have lost untold amounts in this crash--a nasty rebuke, it would seem, for believing in the Internet’s future. Since 1995, Net-related companies have raised more than $150 billion in capital from investors, according to Thomson Financial Securities Data. Only in recent months has the market begun a serious look at what kind of return that investment may ultimately yield.
Thus, the prevailing view on both Wall Street and Main Street is that the “dot-com” craze is, indeed, now a closed chapter of market history, Buckley’s hopes notwithstanding.
Depending on the Net-related stock index you use, there has been some bounce in dot-com shares from their spring lows. But that bounce has been modest compared with the rebounds in many other technology sectors.
At Friday’s close, the Interactive Week index of 50 major Net-related stocks was up 21% from its spring low--after diving 42% from its March record high. That index includes such names as America Online, Yahoo, E-Trade Group and Inktomi.
Meanwhile, the “SOX” index of major semiconductor stocks has resurged 33% from its spring low. An American Stock Exchange-sponsored index of major computer networking stocks has leaped 39% from its low. And an Amex-sponsored index of leading biotech stocks has zoomed 54% from its low.
Last week, amid more warnings from “old-economy” companies that slowing business and consumer spending is beginning to bite into their sales and earnings, the old-economy-dominated Dow Jones industrial average fell 1.6% for the week. But the tech-dominated Nasdaq composite index lost just 0.4% for the week, and actually rose 0.4% on Friday while the Dow slumped 2.5%.
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What the numbers suggest is that investors’ interest in technology has revived--perhaps bolstered by the view that whatever damage is done to the economy by a belligerent Federal Reserve in the near-term, the damage to still-fast-growing technology industries will be less-pronounced.
(That was, of course, the view in the first quarter as well, before the tech sector’s dive in March and April, skeptics will note.)
In any case, while many tech stocks are in demand again, investors’ interest in pure-play Internet stocks--including, but not limited to, e-commerce companies--is tepid at best, and for many issues is nonexistent.
Financial Web site TheStreet.com’s index of 20 e-commerce issues, including Amazon.com, Drugstore.com and EToys, has managed to inch up just 10% from its record low reached in May. From its peak, the index has lost an astounding 62% of its value.
“Goodbye and good riddance!” many conservative investors no doubt are thinking about many of the former e-commerce stock stars. When the stocks were in the stratosphere, those who didn’t own them thought those who did were mad to pay those prices.
At the same time, who wasn’t at least a touch jealous of dot-com investors who were doubling or tripling their money overnight, as they thumbed their noses at classic notions of fair stock valuations?
Now, the bubble substantially deflated, everybody is in reappraisal mode. How could it have happened? What were people thinking? EToys at $86 a share, when it was losing $48 million a quarter? Even at $5.40 a share now, some people think that’s too much for a company for which profitability is still only a theory.
More than a few veteran Wall Streeters have even gone so far as to question whether the money raised by Internet-related companies during the last few years may represent the greatest misallocation of capital in history.
By that view, investors were massively funding solutions to problems that didn’t exist.
Certainly, there has been some of that. There is plenty you can do on the World Wide Web today that you probably wouldn’t miss much if you couldn’t.
Last week in the San Francisco Bay Area, as stretched utilities implemented rolling blackouts to deal with demand for power they couldn’t meet amid the record heat wave, some technology executives might well have wondered about capital misallocation. Perhaps some of that $150 billion raised by Net-related companies since 1995 should have gone to finance new power plants instead?
Still, that money did not go down a rat hole, and probably little of it ended up in Swiss bank accounts, unlike so many of the dollars “invested” in Russia in recent years.
An obvious point worth making is that a huge number of businesses consider themselves primarily Internet-related companies today. That $150 billion didn’t just fund ventures such as EToys and Priceline.com. Some of it, perhaps much of it, also went to computer networkers, specialty chip makers, wireless companies and others whose principal focus is building the Internet infrastructure.
Even the money that arguably was “wasted”--say, on one of those lavish parties we heard about that so many young dot-com companies were throwing for employees and clients in the salad days--went to buy something that drove another part of the economy: catering, flowers, valet parking services, etc.
Net firms also have filled up empty office buildings, spent millions on advertising (including in this newspaper) and purchased mountains of computer equipment.
And many of them will continue to do so, because they’re still sitting on piles of cash raised last year or early this year.
Did those billions cure cancer? No, but the Internet is spreading data and knowledge that may someday be key to a cure.
Most important, the capital-raising binge that funded (perhaps even over-funded) the development of the Internet says something about American entrepreneurship, and the willingness of individuals--and investors--to take significant risks in the creation of something new and potentially life-altering.
Maybe you’re glad it wasn’t your money. But as the Net becomes an ever more essential part of how we live and work, you’ll be glad somebody put up the capital for it.
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Tom Petruno can be reached at tom.petruno@latimes.com.
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How the Net Ate Cash
All told, Internet-related companies have raised more than $150 billion in cash from investors since 1995, counting common stock offerings and debt offerings, according to Thomson Financial Securities Data. Stock and debt totals raised each year, in billions of dollars:
Common stock
Debt and preferred stock
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* This year’s data through last week.
Source: Thomson Financial Securities Data
