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©1999 copyright Fortune.com
Internet Bubble Is Over
By Eric Nee
The Internet stock bubble is over. It didn't go out with a bang, as some had
expected. Instead it's been a prolonged hisssssssss.
We've had small punctures in the past, when Internet stocks went down 20% or
more. But there were always investors eager to jump in and rocket the stocks
up again within days or weeks of the downturn.
But this time is different. The current decline has been going on since May.
It's been steady, and it's been deep.
Take the 10 Internet companies that had the largest market capitalization at
the end of May: AOL; Yahoo; eBay; Amazon; Priceline; @Home; E*Trade; CMGI;
DoubleClick; and Excite, which was acquired by @Home. Every one of the nine
companies is off nearly 50% from its 52-week high. And two, eBay and
E*Trade, were this week trading at only one-third the price of their high
for the year.
Don't expect a big bounce back soon. We are not likely to see those 52-week
highs again for a couple of years. Internet companies are going to have to
grow into those valuations. They won't be handed them again.
Why? Until a year ago the supply of Internet stock was limited, and there
were lots of investors eager to buy. So naturally the price rose. Today
there is plenty of Internet stock available for investors to buy, and more
is becoming available all the time. In 1997 there were 14 Internet IPOs. In
1998 there were 26. So far in 1999 there have been 114 Internet IPOs, and
there are more in the pipeline.
In addition, there are large blocks of never-before-traded stock in
established Internet companies that are coming on to the market from
employees that have vested their options, and investors in venture funds
that have received distributions of the stock. Add in stock and convertible
debt that companies like Priceline are now selling.
In other words, there's a glut of Internet stock. And it's only going to get
worse.
That wouldn't be all bad if the supply of investors continued to grow at the
same pace. But it hasn't. A couple of things have happened to dampen the
wild enthusiasm for anything.com.
Investors are now taking a little harder look at the business models of
Internet companies, and they don't always like what they see. While the
market is often forgiving of Internet companies that put revenue growth
ahead of profitability, investors do want to know that profits can be made
some day. And that's becoming less clear, not more.
If the economy slows down, as it appears to be doing, investors are also
concerned that Internet companies that spend aggressively in anticipation of
fast growth could be in for a rude shock.
Take Amazon. The company is spending aggressively, adding new product
categories like toys, increasing its advertising and marketing, and building
more bricks-and-mortar distribution centers. Revenues nearly tripled in the
last quarter, but losses grew even faster, up six times over last year. That
gets investors nervous.
Investors are also beginning to think that bricks-and-mortar companies are
finally getting their Internet act together. E*Trade is more worried about
Merrill Lynch getting on the Internet than it is about any of the online
trading firms.
Internet startups used to have the dot com story all to themselves. That's
no longer true. If the last few years were all about Internet startups
besting bricks-and-mortar companies. The next few years could be about
clicks-and-mortar, how companies that intelligently combine the best of both
worlds are winning on the Internet.
And for many pure Internet companies that could be a challenge. They may
wish they had used their inflated stock to purchase some bricks-and-mortar
assets when they had the chance to do so.
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=A91999 copyright Fortune.com
We've had small punctures in the past, when Internet stocks went down = 20% or=20 more. But there were always investors eager to jump in and rocket the = stocks up=20 again within days or weeks of the downturn.
But this time is different. The current decline has been going on = since May.=20 It's been steady, and it's been deep.
Take the 10 Internet companies that had the largest market = capitalization at=20 the end of May: AOL; Yahoo; eBay; Amazon; Priceline; @Home; E*Trade; = CMGI;=20 DoubleClick; and Excite, which was acquired by @Home. Every one of the = nine=20 companies is off nearly 50% from its 52-week high. And two, eBay and = E*Trade,=20 were this week trading at only one-third the price of their high for the = year.=20
Don't expect a big bounce back soon. We are not likely to see those = 52-week=20 highs again for a couple of years. Internet companies are going to have = to grow=20 into those valuations. They won't be handed them again.
Why? Until a year ago the supply of Internet stock was limited, and = there=20 were lots of investors eager to buy. So naturally the price rose. Today = there is=20 plenty of Internet stock available for investors to buy, and more is = becoming=20 available all the time. In 1997 there were 14 Internet IPOs. In 1998 = there were=20 26. So far in 1999 there have been 114 Internet IPOs, and there are more = in the=20 pipeline.
In addition, there are large blocks of never-before-traded stock in=20 established Internet companies that are coming on to the market from = employees=20 that have vested their options, and investors in venture funds that have = received distributions of the stock. Add in stock and convertible debt = that=20 companies like Priceline are now selling.
In other words, there's a glut of Internet stock. And it's only going = to get=20 worse.
That wouldn't be all bad if the supply of investors continued to grow = at the=20 same pace. But it hasn't. A couple of things have happened to dampen the = wild=20 enthusiasm for anything.com.
Investors are now taking a little harder look at the business models = of=20 Internet companies, and they don't always like what they see. While the = market=20 is often forgiving of Internet companies that put revenue growth ahead = of=20 profitability, investors do want to know that profits can be made some = day. And=20 that's becoming less clear, not more.
If the economy slows down, as it appears to be doing, investors are = also=20 concerned that Internet companies that spend aggressively in = anticipation of=20 fast growth could be in for a rude shock.
Take Amazon. The company is spending aggressively, adding new product = categories like toys, increasing its advertising and marketing, and = building=20 more bricks-and-mortar distribution centers. Revenues nearly tripled in = the last=20 quarter, but losses grew even faster, up six times over last year. That = gets=20 investors nervous.
Investors are also beginning to think that bricks-and-mortar =
companies are=20
finally getting their Internet act together. E*Trade is more worried =
about
Internet startups used to have the dot com story all to themselves. = That's no=20 longer true. If the last few years were all about Internet startups = besting=20 bricks-and-mortar companies. The next few years could be about=20 clicks-and-mortar, how companies that intelligently combine the best of = both=20 worlds are winning on the Internet.
And for many pure Internet companies that could be a challenge. They = may wish=20 they had used their inflated stock to purchase some bricks-and-mortar = assets=20 when they had the chance to do so.