OT--Internet Stocks On Thin Ice

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Published Sunday, February 6, 2000, in the Miami Herald

Internet stocks surf on thin ice

JOHN DORSCHNER jdorschner@herald.com

The long-anticipated reality check on the Internet stock boom appears to have started.

After two years of investor exuberance, a considerable number of dot-com stocks are falling in what many experts believe is more than a temporary market adjustment.

For Internet surfers, this could mean that some favored Internet sites may disappear. For e-shoppers, it could mean fewer places to shop -- and higher prices.

For investors, it could mean a big hit in the pocketbook.

``There's a definite shakeout going on,'' says Matthew Esh, an analyst for the Bear Stears investment banking and securities firm. ``Investors are a lot wiser than they were a year ago. When these first stocks first came out, they were just ideas. Now there's a lot more information about them, and people are able to take a hard look at their financial prospects.''

Many experts think it's about time, for many dot-coms seemed to have violated all the rules of the financial game.

They are fledgling companies that target consumers -- like Amazon.com, only five years old, which has never earned a penny of profit and posts steadily increasing losses. Yet Amazon's stock has soared from $2 to as high as $113, making early investors and veteran employees into multimillionaires.

The roaring dot-coms created euphoria among many investors, who felt empowered by their new ability to make trades directly from their home computer. Many have bet huge bundles of their savings on the hope that Internet companies might someday be profitable.

That hope is clearly subsiding. ``The market's maturing,'' says Jim Bohart of Birinyi Associates, a Connecticut research firm. ``Some companies' stock is going to come way down in price. Some companies aren't going to make it.''


Some money managers are recalling the early 1900s, when there were several hundred car manufacturers in America. ``Many are called,'' says Mario Gabelli of Gabelli Funds. ``But few are chosen.''

Rebecca Nidositko, an e-commerce analyst for Yankee Group, a research and consulting firm, says: ``If you're top dog in a sector, you may be OK. If you're not in the top two, you're in trouble. If you're at the bottom, you're talking to others about how to team up, or you're looking to be bought. Or there could be some slow deaths. Or sudden deaths.''

A Birinyi Associates study of 47 top Internet stocks revealed that almost half are down more than 50 percent from their last-year highs.

Some Internet stocks -- particularly those focused on business-to-business aspects or the backbone of the network, like Cisco Systems -- are still strong, but the lower tiers of the general consumer sites have been hammered:

EToys, which was trading as high as $70 in the pre-Christmas shopping euphoria, is under $20. Its sales tripled during the season, but it was left with a huge inventory.

Value America, a site selling everything from computers to shoes, had a disastrous holiday season, at one point spending an average of $500 in advertising to get each new customer. The company has replaced its chief executive, axed half of its 600 employees and cut its product list. Its stock, as high as $74 last year, is now trading around $5.

Beyond.com, a software store, has dumped its chief executive, let go 25 percent of its work force, and de-emphasized its retail operations in favor of servicing businesses and governments. Its shares, as high as $37 last year, are now at $6.

A women's site, iVillage, which soared to $130 after its initial public offering last April, is now at $21.


None of these companies have ever been profitable, and some stock analysts who use traditional measuring sticks have long been warning that these Internet stocks were way overvalued.

What has been happening is that the chorus of doomsayers has been growing, and it now includes the likes of Mike Levy of Fort Lauderdale. ``A lot of the companies are grossly overvalued,'' he says. ``They have questionable business models, especially in the e-commerce area, and there are signs those in retailing are never going to be strongly profitable.''

Levy is more than just another talking head in the stock game. He is chief executive of South Florida's largest dot-com, SportsLine, and is also on the board of several other Internet companies, including iVillage, NetCreations and MVP.com.

Levy carefully exempts his firms from his statement -- ``these are all very solid firms'' -- but he says he now understands that ``there are price wars on a lot of these products, like CDs, so that the [profit] margins are never going to be great.''

SportsLine, which has yet to earn a profit, has not been immune from the trend. After reaching a high of $83 just before Christmas, it is now at $38.


One good example of what has been happening to the Internet can be seen in the tale of two New York dot-coms with South Florida connections.

TheGlobe.com, started by two Cornell students in their dormitory room with a borrowed $15,000, caught the eye of a Fort Lauderdale investor, Mike Egan, former head of Alamo Rent-A-Car. In 1997, Egan invested $20 million and became chairman.

TheGlobe.com expanded into a general portal, offering everything from stock information to travel reservations. In November 1998, it went public in a record-breaking initial public offering, its shares soaring from $4.50 to $48.50 on the first day of trading. (The prices are adjusted for later splits).

But faced with competition from the likes of the mighty Yahoo, TheGlobe.com had trouble finding a large audience, and it has gradually emphasized a ``community concept'' in which people of similar interests can communicate in ``clubs'' or chat rooms, set up their own Web pages or share e-mails.

According to Media Metrix, a media measurement firm, TheGlobe ranked 35th among Web sites during December, with 4.7 million different visitors.


Such numbers have not wowed investors. TheGlobe's stock is now under $8 -- less than one-sixth of its first-day value.

Egan says he can't understand it. ``The company is doing extraordinarily well. Except for one quarter, we've made all our revenue projections,'' though the firm is still losing money.

Two weeks ago, the founders of TheGlobe, Todd Krizelman and Stephan Paternot, announced they were stepping down as co-chief executives. ``They did a marvelous job,'' Egan says, ``but we decided to go in a slightly different direction'' by bringing in more experienced business leaders.

A marked contrast to TheGlobe is a company backed by a Miami father-son investing team, Marc and Kevin Watson. They put $5 million into what was then known as Miningco.com, billed as a great search engine that offered hundreds of human ``guides.''

Miningco.com stock had a strong surge when it went public last March, but executives decided that the company needed an image boost if it were going to succeed.


After changing its name to About.com and spending $20 million on a creative marketing campaign that was written up in many major publications, the Web site has created a massive audience. For December, Media Metrix ranked it ninth.

Its stock, which went over $90 in December, is still at a relatively decent $70.

``A lot of people thought we were nuts when we spent that money on marketing, but it worked out,'' Kevin Watson says. ``You're seeing a dramatic bifurcation in consumer brands right now. The larger sites are continuing to grow, and the smaller sites are struggling for the scraps.''

His father, Marc, adds: ``The consolidation game is going to start. You can label it consolidation in a friendly sense, but it's really a collection of spoils by the victors.''

In fact, Egan acknowledges the buzz that TheGlobe.com is a candidate for a merger or being bought out. ``The rumor is fundamentally true. We have had a lot of interest.''


While the lower tiers of the dot-com world have been struggling, the upper levels have not been completely without problems. Yahoo, the giant portal that actually shows a profit, albeit a meager one, reached $500 a share early last month. Now it's at $353.

America Online, another marginally profitable company, was trading at $95 in December before agreeing to enter the bricks-and-mortar world by marrying Time Warner, a move that has seen AOL's stock slip to $58.

And then there is Amazon, which continues to have a loyal following. Many investors were stunned last month when the fast-growing company said it was laying off 150 workers -- 2 percent of its work force -- and the stock fell from a high of $110 around Christmas to $60 last Monday.

On Wednesday, Amazon issued its quarterly report, announcing increased revenues -- and huge losses, 543 percent higher than last year's. Still, Chief Executive Jeff Bezos vowed he was going to ``drive toward profitability,'' and Internet investors, once again showing boundless enthusiasm, responded by giving the stock a 22 percent boost on Thursday. Friday, it slid back 7 percent to close at $78.56.

``These are just fluctuations in the market,'' warns Nidositko of Yankee Group. ``You can't pay too much attention to that. The long-term question is still there: Can they make money from the consumers that are out there? They have to show that.''


Whether Amazon can or can't make money, experts agree that the importance of the Internet continues to grow as more of the world comes on line.

Venture capitalists are pouring hundreds of millions of dollars into business-to-business sites, which seem to promise easier profitability than retail dot-coms, and there is a massive need for servers and connecting switches and an ever-increasing cry for greater bandwidth to speed up access.

``This is one of the great revolutions of all time,'' said Gabelli, the mutual-fund leader. ``It's greatly increasing our technology while driving down costs. But there will be losers.''

-- side sitter (sidesitterr@sidesitterrr.xcom), February 07, 2000

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