BW ONLINE DAILY BRIEFING

STREET WISE by Sam Jaffe	September 21, 1999

The key to succeeding on the Internet is similar to a winning football strategy: Score early and score often. If you've beaten the competition in the first quarter, holding on for the rest of the game is a breeze. From the Dallas Cowboys to Yahoo! (YHOO), examples abound.

Like most other things in life, football, and business, however, such truisms aren't quite accurate. While being the first mover in a market niche does provide a Web site an enormous initial advantage, there's no guarantee that the edge will last. The business equivalent of the Indianapolis Colts, who led Sunday's game with the New England Patriots 21 to 0 but eventually lost 31 to 28, may be Netscape. The first huge Net IPO, it promised to dominate the New Paradigm through its early monopoly in the browser market. It lost its browser lead to Microsoft (MSFT) and Netscape was bought by AOL (AOL).

The Internet stock universe is today dominated by four companies that were the first movers in their fields: America Online was the first successful Internet service provider; Yahoo! was the first blockbuster portal; Amazon.com (AMZN) was the first successful e-tailer; and eBay (EBAY) was the first successful Web auction house. Investors have recreated the Nifty Fifty experience on a smaller scale with these stocks. The Nifty Fifty, you may recall, were a group of 50 stocks including Xerox (XRX), IBM (IBM), and Gillette (G), that delivered earnings increases every quarter -- and which investors in the 1960s were willing to pay enormous prices for, even though other stocks were much cheaper. Of course, those inflated stock prices collapsed in the bear market of 1973.

NOT WORTH IT? Will the Fab Four suffer the same fate? That's for a latter-day Nostradamus to say. But what can be said with certainty is that these Net stocks are extremely expensive. Although the first-mover advantage does make a company more valuable, it's very hard to make the argument that it's worth the enormous premiums now attached to these stocks.

That's why investors shouldn't hesitate to buy the second and third movers in a sector -- as long as their business plans make sense. "The first-mover advantage is still very important, but less so than it used to be," says Monument Internet fund (MFITX) manager Alexander Cheung. "Most Internet users have one to five years of experience now and have broadened their horizonsÖ. They're willing to try new things."

eBay could experience this, for instance. Thanks to its early start, it has an enormous lead over competitors in the person-to-person auction space. It usually has more than 2.5 million items on auction and more than 6 million registrants. Its biggest competitors are Yahoo!, with less than 500,000 registered auction users, and Amazon.com, with about 100,000. eBay already turns a profit, and its costs are minimal. Its business plan is to die for. But it isn't necessarily worth a price-to-earnings ratio of 1,400.

LIKE A STRADIVARIUS. Likewise, if you buy AOL's stock, you'll have to pay a p-e of 158.8. Pick up shares in Earthlink (ELNK), which is the No. 2 ISP with an expected 2 million customers by yearend, and you have to pay only 48.7 times its projected 2000 earnings. Both companies have similar forecasts for percentage growth in revenue, profits, and membership, yet Earthlink is one-third the price of AOL.

In the retailing arena, Amazon.com is the undisputed virtuoso, with more than $609 million in sales in 1998. Its stock is about as expensive as a Stradivarius: it costs $20 for every dollar in revenue the company produced last year. Second place e-tailer Beyond.com (BYND) costs only $6.81 per dollar of 1998 revenue. And we're not just talking about a shoddy imitation. Analysts expect Beyond.com's revenues to grow by 450% over the next five years. Amazon.com faces similar expectations over the same period. It's impossible to judge either company by p-e, since neither turns a profit yet and probably won't in the next year. But which looks to you like a better buy?

Yahoo!, which was the first portal to go public, also is expensive compared with its competitors: Its stock now boasts a p-e of 470. No. 2 portal Lycos (LCOS), although still preposterously expensive, is significantly cheaper, with a p-e of 280. Still, the disparity is hard to explain, since the number of unique visitors to Lycos' sites is neck and neck with Yahoo!'s, according to ratings firm MediaMetrix. The upshot: No. 1 isn't that far ahead of No. 2, except in the cost of its stock.

The moral of the story is this: No. 2 isn't a bad place to be, at least if you're looking for investment opportunities. That's the second-mover advantage.


Jaffe writes about the markets for Business Week Online

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

BACK TO TOP