The Internet Has Great Value. But
How About Its Stocks?
by Sy Harding, editor
Street Smart Report
For
sure the Internet is an exciting technological, commercial, and communications
breakthrough. And, it's still in its infancy.
On
the communications side, 60 million people already stay in closer contact
with friends and family through the magic of e-mail. Businesses hardly pick
up a phone or lick a stamp anymore, sending catalogs, sales pitches, specifications,
purchase orders, acknowledgments, etc., via the 'Net, having them delivered
and confirmed literally within minutes.
The
retailing side is absolutely exploding. Forty percent of all books sold
are now being bought online. Dell Computer already sells more than half
its PCs from its Web site. You name it, from airline tickets, automobiles,
and Beanie Babies, to toys, tools, and zoological supplies. It's all available
without leaving your home or office, delivered within a few days, and usually
at a substantial discount.
Advertisers
are already spending $2.8 billion annually for ads on Internet sites. It's
estimated that will grow to $22 billion by 2004. If that happens, Internet
ad revenues will leapfrog past radio, yellow pages, and magazine advertising,
leaving the Internet trailing only television, newspaper, and direct mail
as the ad media of choice.
Pretty
exciting stuff. And it's not hype. It really does work just as advertised,
if not better.
However,
for the thousands of Internet companies that have sprung up to serve those
enthusiastic customers, it's a different situation. For them the reality
has not caught up with the dream. Only a handful have figured out how to
make a profit from the phenomenon.
Online
bookseller amazon.com for instance, grows at an incredible pace. From zero
to nine million customers in four years. All without the cost of retail
stores and the staff normally associated with such sales. Yet, the more
books it sells, the more money it loses. The company added music CDs to
its product offerings. Same result. The more CDs it sells the more money
it loses. It recently added toys. Same results.
E-trade,
the leading online stockbroker, is expected to double it revenues again
this year, but its losses are expected to widen to $.40 a shares from last
year's $.01.
Infoseek
has a powerful partner in Disney, which owns 43% of the company. But, even
though revenues are expected to be up 300% this year, losses are expected
to be up 700%.
The Internet
search engine Yahoo has understandably been an exciting stock. The company
is one of the handful that actually makes a profit. It's expected to have
profits of $.40 a share this year, and $.55 next year. The problem is, in
the excitement over seeing actual profits, investors bid the stock up to
$244 a share (it recently dropped back to 'only' $126 a share). I'll leave
you to figure the price to earnings ratio.These
are companies at the top of the game. Thousands of others, both public and
private, have had even greater problems trying to figure out how to turn
a profit.Where
do they get the money that keeps them going, billions of dollars that mostly
disappear in earnings losses? From investors excited about getting in on
the beginning of a major new technology.But,
historians warn that the first wave of exciting new companies in a new industry
usually undergoes a major shake-out fairly early on, in which most of the
pioneering companies disappear. A few survivors, but more often new companies
with fresh ideas, then go on to take over the industry.They
use the automobile industry as an example. In the early excitement over
`horseless carriages', more than 4,500 start-ups entered the field. Many
had some pretty nifty automobiles, but few made any money. After the shake-out
that followed, only 20 remained in business. Even General Motors, thought
to be one of the most promising, went bankrupt on its original investors,
and emerged under new ownership.It
was a similar situation when the personal computer age arrived. Early PC
makers, dozens of them, names we can't even remember, were very hot stocks
in the early 80s. Apple, AST, AT&T, Commodore, Encore, Heath, IBM, Kaydon,
Wang, dozens more, long forgotten. Of the start-ups, few survived, and only
Apple survived as a PC maker. New start-ups with better ideas; Dell, Compaq,
and Gateway, came along, drove the others out, and soon were the industry.The
shake-out of the pioneering Internet companies will almost surely be on
a similar scale. That's why most institutional and long-term investors leave
the Internet stocks to the short-term traders, where quick profits for the
nimble may be possible in the wild moves. But, trying to pick the few ultimate
survivors long-term has high odds of being a losing proposition.Editor's
Note: Sy Harding is president of
Asset Management Research Corp., 169 Daniel Webster Hwy., Ste 7, Meredith,
NH 03253, publisher of The Street Smart Report Online at www.syharding.com,
and the Street Smart Report newsletter published every 3 weeks for
$225 annually. A daily Hotline is also available twice each day 9 a.m. and
7 p.m. via 1-900-820-2020 (2-3 min. messages @ $2.40/min.) Sy Harding is
author of Riding the BearHow to Prosper in the Coming Bear Market available
at most book stores. Mr. Harding is consistently ranked a Top Stock Market
Timer, and Top Gold Timer by Timer Digest.