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A Healthy Shakeout In Net Stocks


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A Healthy Shakeout in Net Stocks

It has been a wild summer for Internet stocks. The high reached in July was followed by the first great Internet sell-off in August. IPO euphoria, then IPO sadness. Dreams of getting rich quick--and young--became real, then were tempered. Even though Net stocks have recovered from their lows, does the giant sell-off mean the end of the Internet stock boom? Will it close the great capital spigot pouring billions into new Internet enterprises? Some say yes. We say no.

In fact, the shakeout may indicate that dot.com mania is starting to evolve into market maturity. Only now is stock pricing beginning to reflect the true financial prospects oF the hundreds of Net companies out there. And only now are investors starting to distinguish between those that have profits and those that don't, those with significant revenue growth and those without, and those that have major market share and those that don't. Investor discrimination is a good thing, not something to anguish over. Taking air out of the Net bubble makes the market as a whole much more sustainable.

Not that the shakeout hasn't been painful, even for those companies that have successfully raised capital. At its low in early August, Amazon.com Inc. was down 60% from its 52-week high. E*Trade Group was down 67%, MarketWatch.com 79%, TheStreet.com 72%, and Yahoo! 50%. E-Loan's initial public offering was priced at 14, went off at 20 1/2 on June 29, shot up to 63 on July 6, only to tumble below its first-day price by early August (page 60). It has since rebounded to 40, and most of the other Net stocks are off the bottom, too. But for Net companies that had hoped to use high-price stock to buy other companies and rapidly expand market share, the gyrations were quite a blow. Web folks working their 24-7 days hoping to hit it big and fast got a cold dose of reality.

But a salubrious one. The Net bubble deflated smoothly. Had it popped, it could have brought down the entire market, and perhaps the economy. There is still plenty of froth. Red Hat, which offers the Linux operating system but has no profits, had a recent IPO priced at 14, soared to 90 in days, and now trades at 73. But risk and reward are a bit more closely matched. And institutions are beginning to ask what individual Net stocks and IPOs are really worth. For the economy as a whole, the crash in Net stocks was a plus. If we're lucky, we got off easy.


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