Nerds send Net shares into space

IN THE ANNALS of stock market hysteria there have been few events as extreme as the frenzy surrounding Internet shares on the New York stock market. Companies with almost no intrinsic value have soared to stratospheric levels merely because their name is in trendy, lower case type or includes the ominous tag: ".com".

It calls to mind the bubbles in oil companies, biotechnology and the early computer industry itself. "A rising price begets a rising price," says Joe Battipaglia, chief investment officer at brokers Grun-tal. "I am surprised at what is happening, particularly after the summer shakeout."

Shares of AvTel Communications, a money-losing Californian computer manufacturer, rocketed 1278% in a single trading session to $31 earlier this month. Theglobe.com, a small Internet site operator, floated its shares at $9 and by the second day of trading they had hit $87. Shares of eBay, an online auction company, hit $140 earlier this month, valuing the company at a mind-boggling $5 billion (GBP 3 billion) or 773 times next year's earnings. EarthWeb's shares have gone from $18 to $76, valuing the company at $600 million on revenues of a mere $2 million, while Yahoo!, the best known of the Internet search engines, is trading happily on a price-earnings ratio of 270. According to Goldman Sachs, Internet stocks rose 11.6% in the first 10 days of this month, compared with 1.5% for the stock market as a whole. Much of the buying has been by so-called "day traders" - people who trade from home online, dodging in and out of the market daily. They are often enthusiastic computer users who whip each other into a frenzy discussing their favourite Internet companies on chat rooms. In many cases, speculators are hoping that these companies will be bought out at huge multiples by much bigger rivals such as AT&T or Microsoft. "It is like the biotech sector once was," says Battipaglia. "Amgen and Genen-tech were once small companies with no earnings, too. A lot of capital raced into that sector and there was a high fatality rate. It is the same with Internet stocks. A lot of capital is being created artificially by inflated stock prices that will be destroyed artificially when prices fall." Indeed, many stocks already have. People who bought Avtel at $31 have seen their shares crash to $10.5, while Theglobe.com shares have plummeted from $87 to $48. Like the computer stock craze 10 years ago, Internet companies are not valued on their profits which are often non-existent but on revenue growth. To keep their share prices soaring they spend vast amounts on advertising to attract more revenue. But this depresses their profits, which makes the share valuations look even crazier. This process is bound to undermine some companies. The problem is that no one can be sure when, and which companies. Battipaglia's advice is to treat the hysteria for what it is worth: quick trading profits. "Sell into strength, buy on weakness," he says. But never hold on to shares with a price of 773 times earnings.

Copyright 1998
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