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Should you follow suit? There are more reasons than simply following one of the world's richest and most powerful investors for you to consider doing so -- provided that, like the prince, you can handle the risk and are willing to wait a few years for the investments to pay off. Wall Street is still largely avoiding the so-called B2C, or business-to-consumer, sector of the Internet, and the group has pretty much bottomed out since hitting lows in mid-April. That means that even if the overall tech market remains volatile, the downside for these battered names is less scary than it was just weeks ago. NO QUICK FIX. At the same time, the trends that fueled the rise of Internet stocks to nosebleed levels are still in place. While the speed of Internet adoption may have slowed a bit, U.S. consumers are still flooding online, and the rest of the world is coming on even faster. The spread of broadband connections will spur adoption rates, e-commerce, and advertising opportunities. Web access via wireless devices and interactive TV will also buttress Web businesses. And though it's too early to tell for sure, Terra Networks' planned acquisition of Lycos could be a catalyst for more such deals. "People are still bullish on the Internet in general, and as long as that is the underlying sentiment, this sector is not going to stay at the bottom," predicts Chris Nerney, a senior analyst at internet.com, an Internet industry portal, and member of the committee that oversees the company's index of Internet stocks (ISDEX). "Investors need to take a harder look at the sector and try to back the winners." That's the big picture -- for those investors willing to plunk down cash and wait what analysts say could be five years or more for a decent return. Near term, though, there is no quick fix for the problems that ail the Internet market. Interest rates are rising, and a glut of e-commerce and online media companies are scrambling for cash. Many analysts don't expect a rally until the fourth quarter -- when retail and media stocks usually get a lift. "Typically people are doing other things than surfing the Net in the summer," says Darren Chervitz, an analyst with Jacob Asset Management in New York. In the fall they spend more time online and start to do some holiday shopping. "Hopefully, the Fed will be done raising rates by then," he adds. The least risky way to buy into the sector is with the leaders: Investment strategists recommend picking proven names that dominate their respective areas and that have business models that show profits -- or promise to shortly. As Merrill Lynch analyst Henry Blodget wrote recently: "The best stocks will go down less and recover faster than the rest of the sector." The two names at the top of the top tier are America Online (AOL) and Yahoo! (YHOO). Both are profitable and reach the most people on the Net: AOL has about 60 million users across the Web, and Yahoo! has 48 million, according to Media Metrix' March figures. The problem with these two stocks is that they are still a bit expensive. Nerney points out that Yahoo!, while 45% off its high of $250, is still trading at about 88 times its trailing 12-month revenues. "There's nothing wrong with waiting for a better entry point," he says. MORE SPECULATIVE. America Online, which is down about 40% from its high, is also still far from cheap. It is trading at 140 times earnings, and analysts believe its revenue growth rate will slow as a result of its Time Warner acquisition. Chervitz says he would have considered both stocks if they had fallen an additional 10% to 20%. But support from major institutions has kept them from falling too far and also restricts how far they might rebound. "The upside may be limited for the amount of risk you're still taking," he says. John Garrity, associate research director at Investec Ernst & Co., recommends that investors also consider Microsoft. With 47 million visitors, its network of sites is a close third behind Yahoo! in terms of audience, yet the market hardly counts the Internet in its stock valuation, Garrity says. Even if the software king isn't broken up, which would cast more light on the value of its Web properties, he calls it "an incredible buy at these levels." The stock is more than 40% off its highs. Other stocks that are on many analysts' list of Net leaders but are more speculative as investments include Priceline (PCLN), eBay (EBAY), and Amazon.com (AMZN). Each has a unique, defensible Web business, but there are still plenty of doubts about how successful each can be long term. Nerney adds RealNetworks (RNWK) to this list. It has a dominant market share and defensible leadership in streaming media, he says. "BAND-AID FINANCING." Investors willing to go further out on a limb can consider a crop of companies that are down substantially from the lofty prices they once commanded but are still executing well on their business plans. Chervitz likes portal About.com (BOUT) and search engine Goto.com (GOTO). Garrity thinks Sportsline.com (SPLN) has "little downside risk," a great brand name, and should be profitable by the fourth quarter of this year. He also likes Ziff-Davis (ZD), which is merging its Internet subsidiary, ZDNet (ZDZ), back into the parent company. Robertson Stephens, meanwhile, has strong buy recommendations on Modem Media.Poppe Tyson (MMPT) and Ticket Master Online-CitySearch (TMCS). A final option, which only the most daring investors should consider, is taking a flyer on a name that has been all but counted out by Wall Street -- and there are plenty to choose from. You need to make sure the company has enough cash on hand to last until it realistically stands a chance of becoming profitable. CDNow (CDNW), Value America (VUSA), and drkoop.com (KOOP) all have gotten cash infusions from big-name investors lately. Still, Robertson Stephens analyst Lauren Cooks Levitan calls these kind of infusions "Band-Aid financing." If companies can't get into the black, "their stock values will remain depressed, leading to a prolonged existence on life support," she wrote in a recent report. Even if a faltering company seems likely to be bought out, keep in mind that "a lot of deals with struggling companies are not done at premiums," says Chervitz. "They may get bought, but it may not be at the price they are hoping for." Meantime, such companies are trying to stretch their cash until they can win back Wall Street. Community-oriented site theglobe.com (TGLO), which Chervitz calls "an icon for what went wrong in Internet mania," is trying to come back. (It skyrocketed at its debut in late 1998, but it's now trading at less than $3 a share. "We're not going to come back based on hype," says its president, Dean Daniels. "We're going to come back when we prove our business model." Maybe so. But, says Chervitz, "it's going to be a tough go for second- and third-tier companies." In fact, it seems that even a veteran contrarian like Prince Alwaleed thinks it's safer to stick with the top tier. Stone covers the markets for Business Week Online EDITED BY DOUGLAS HARBRECHT |
