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MARCH 31, 2003 STREET WISE By Amy Tsao Are Net Stocks the New Blue Chips? Big names such as eBay, Yahoo!, and Amazon are gaining ground even in this rocky market. Still, they're far from safe bets
These companies should post growth even if the war drags on and the economy remains sluggish, many analysts believe. And buying opportunities may present themselves in the weeks ahead. "When we think of normal defensive postures, we think strong, globally diversified companies," says Donald Luskin, chief investment officer of TrendMacrolytics. But in times of market volatility and uncertainly, agility and innovation can create calm waters, too. Adds Luskin: "Nimbleness is more important that sheer size." The prospering dot-com survivors have come a long way from the freewheeling bubble years. Today, a proven business model means everything. And though online sales still represent just a tiny fraction of retailing's total, they jumped 28% in the fourth quarter of 2002, vs. an overall increase of just 0.9%. "While other tech companies are having a tough time, a lot of these companies are showing very profitable business models," says Internet analyst Youssef Squali of First Albany Corp. "They are exceeding estimates and raising guidance." WINDOW OF OPPORTUNITY? None of this has escaped the market. Net-stock valuations are already quite high. "Everyone has figured it out," Luskin notes. Expedia trades at 47 times analysts' consensus estimate for current-year earnings per share, eBay at 89, Yahoo at 81, and Amazon at 85. If prices on this group slump as momentum-chasing money managers cash out when the second quarter starts, as some market watchers believe will happen, investors may soon get a chance to buy at lower prices. In the case of eBay, "it has been a stock that probably has had some short-term money flowing in," says Christa Sober, analyst at Thomas Weisel Partners. (She doesn't own shares personally, and her firm hasn't done banking with eBay in the past year.) Squali figures that Yahoo stock looks attractive at $20, vs. the $25 per share price it carried on Mar. 28, and eBay would be attractive at $75 vs. its current $90 per share. (He doesn't own shares, and his firm doesn't have a banking relationship with any of the companies mentioned in this story.) SOME IMMUNITY. eBay, perhaps more than any other name in this area, rates a premium. Its auctions continue to grow in popularity, and the company has made few missteps. "For longer-term investors, this is a blue chip," says Sober. "They've got areas [of business] that are still growing at triple-digit rates." eBay's recent purchase of electronic-payment company PayPal and increased marketing costs could dampen margins in the near term. Still, that might only create a buying opportunity. Analysts predict that eBay's sales will rise at least 60%, to $1.9 billion, in 2003, and EPS are expected to rise 53% from 2002 levels. While these companies have developed some immunity to macroeconomic factors, they aren't invincible. "Given our outlook of modest growth in consumer spending, we're not really excited about a lot of retailers, like eBay or Kohl's (KSS )," says Jeffrey Kleintop, chief investment strategist of PNC Advisors. Others look at Nasdaq's historic volatility and warn against playing the sector. "The Internet is great for consumers and society, but in the business world it's very difficult to monetize," says Chris Jarvis, associate research director at Advest. He points to eBay and Yahoo as exceptions, but he says their stock prices reflect success. VALUE AND RISK. With Amazon, hold and sell ratings from analysts outnumber positive opinions by 8 to 5. Critics point to its substantial debt load of $2.3 billion. Yet Amazon is coming off a strong holiday quarter and expects to be profitable throughout 2003. That's a huge improvement from years of steep losses. And the consensus on the Street is that Amazon's 2003 EPS will rise 88%, to 32 cents, on a 17% increase in revenues, to $4.6 billion. Yahoo, too, is expected to see a sharp EPS increase, up 66%, to 30 cents. Standard & Poor's analyst Scott Kessler expects revenues to grow 27% this year. But he's also worried that too much of Yahoo's fortunes are tied to online advertising. He has a sell rating on the stock. "Our calculation of the stock's intrinsic value was recently more than 80% below the share price," Kessler wrote on Jan. 22, when the stock was trading at $18. The only way to play Expedia, which will soon be fully owned by USA Interactive (USAI ), may be to buy shares in the media giant. Still, Expedia itself could stumble amid worries over a prolonged travel slowdown (see BW Online, 3/19/03, "Have Travel Sites Hit Maximum Altitude?"). For now, analysts project 2003 EPS to rise 37%, from 85 cents to $1.17. Bottom line: The war market isn't for the faint of heart. Investors enter at their own peril (see BW Online, 3/28/03, "How Real Time War Drives the Market"). But anyone looking for buy-and-hold Internet bets might consider the leaders of the pack, especially if they appear at lower prices in the near future.  Tsao covers the markets for BusinessWeek Online in New York Edited by Douglas Harbrecht Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | MARCH [an error occurred while processing this directive] |
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