Welcome
to the E-world
by Dr. Hans Black, editor
Interinvest Review & Outlook
"While the Internet was obviously an incredible opportunity to hype a new technology, it was also a genuine breakthrough in communications that continues to fulfill its potential."
Now
that the global information technology industry is mired in the
deepest recession it has experienced in the past two decades,
it is perhaps a good time to look beyond the current gloom to
future prospects. While we continue to have longer-term concerns
about valuations for technology stocks in general, the current
pessimism in the sector is too myopic. The continuing changes
in how businesses interact with each other and with their customers,
and how consumers have, in the period of only six or seven years,
been drawn to the Internet with such fervor augur well for the
future.
Gone, of course, is
the great boom, fanned by analysts' ridiculous evaluations and
absurd pronouncements that made headlines two years ago. The
bust has indeed been incredible. Given that the experience of
so many of the managers, technicians and other involved in the
technology industry spans an average of less than ten years,
it must seem as if the end of the world has abruptly arrived.
Great busts typically come from great booms, from enormous overbuilding
financed by banks and others too shortsighted (or greedy, or
both) to realize their capital would be sucked away at the first
sign of difficulty.
While the Internet
was obviously an incredible opportunity to hype a new technology,
it was also a genuine breakthrough in communications that continues
to fulfill its potential. Faster processors and a much-improved
infrastructure at the fiber optic level will ensure the benefits
of the Internet will expand dramatically. Successes of the past,
such as the peer-to-peer (P2P) song-swapping service, Napster,
which went from zero to fifty million users in just six months,
will occur again. The advanced search engine, Google, is another
example of tremendous growth with a successful technology in
the past eighteen months. Even in the depths of this bear market,
companies such as Yahoo!, Priceline and Amazon are demonstrating
strong user growth, while AOL's numbers show overall Internet
usage continues to leap ahead.
The collapse in Internet
advertising since the fourth quarter of 2000 is, in our opinion,
a temporary phenomenon, as advertisers will realize that as long
as the eyeballs are still looking, their ads will be effective.
This is not to say we will go back to anything like the optimism
that prevailed in 1999 or early 2000, but the current climate
of doom is clearly exaggerated.
Businesses, of course,
led by some of the very largest in the world, such as General
Electric, have also been digitizing at an incredible rate. Business-to-Business
(B2B) applications have been employed with great success; costs
have indeed plummeted and efficiencies introduced. Look at any
fortune 500 company today and you will see where this process
is being applied to a greater or lesser degree from giants like
Wal-Mart, who have been using digital technology with incredible
prowess, to virtually every media and entertainment company.
In Europe, for example, Astra, a joint venture with the European
satellite system, now beams free programming into any home that
has a 50-centimeter (18-inch dish on its balcony or roof.
We believe one of the fallacies propounded recently is that Internet growth is already close to saturation. With 56 percent of U.S. households now hooked up to the Internet, how much further can this grow? We believe one of the answers is to look around the world where Internet usage is still surging. In Europe, for example, where less than 20 percent of European households are estimated to have Internet access, growth rates are escalating. (One of the obstacles to more rapid growth in Europe is the insistence by telephone companies on charging for local calls, making Internet access for long periods of time a costly venture.) Furthermore, in Asia, where growth has been even more rapid, there are still less than 5 percent of households with Internet access. Of the Asian countries, China, Malaysia, Indonesia and India are leading the pack in spectacular growth rates. Latin America, where penetration rates remain low, is also registering very rapid growth. It would not surprise us to see one of the more bullish arguments put forward by analysts in the next one to two years will be that growth in international Internet usage is surging and that the concomitant e-commerce opportunities are being stimulated by that process.
As investors, we have been putting capital back to work in some of these technologies. Such situations as Corning Glassworks, the world's leading fiber optic company, or such companies as Cisco and Red Hat are all examples of opportunities we see with a one-to-two year time horizon. Specialized companies in software niches or companies that provide better control distribution should prosper. On a tactical note, we believe that within twelve months attitudes will have changed and by mid-2002 we should be in the midst of a mini technology bull market. The timing of this should be roughly three to six months following the anticipated initial public offering for Google, which should re-ignite investor optimism. Unfortunately, it is likely that from any mid-2002 peak in these shares, we will then see another downturn amidst even more gloom in 2003. In short, the pendulum is due to swing the other way for a while, and in all likelihood, it will be a profitable period.
Editor's Note: Dr. Hans Black is editor of the Interinvest Review & Outlook, P.o. Box 1585, Boston, MA 02104, 1 year, 12 issues, $125. Visit the Web site at www.interinvest.com.
