Bear stages sneak attack on Net stocks Nasty swipe bursts bubble! : LUSENET : TimeBomb 2000 (Y2000) : One Thread

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Bear stages sneak attack on Net stocks Nasty swipe bursts bubble, leaves e-stocks bleeding
By Matt Krantz

and James Kim

Time to face the hard truth: The Internet bubble has burst.

The carnage is easy to miss. After all, a steady stream of Internet companies are still selling stock to the public; many still double, triple or more on their first day of trading. And the USA TODAY Internet 100 index is up 72% from its inception last June. For the year, it is up 6%.

But dig deeper, and the landscape gets ugly fast. On average, each stock in the Internet 100 is down 38% from its high, which by even the most optimistic definition qualifies as a bear market.

Throw out companies such as Cisco and Broadcom that serve other companies -- the currently hot business-to-business sector called B2B -- and it's very clear just how much some Internet investors are suffering: The USA TODAY e-Consumer 50, a subindex focused on popular firms that primarily serve consumers, is down 16% for the year and 24% off its high.

Some of the Internet's best-known names sport the biggest bruises. is 35% below its high; America Online is down 44%; is down 60%; eToys is down 83%; and Charles Schwab is down 50%. Several once-popular stocks, such as and, now trade for less than $10 a share.

A dramatic shift has taken place on Wall Street, where investors used to pour cash into Net stocks even if the companies had no hope of making a profit anywhere in the near future. Now the attitude appears to be that Internet companies must prove they are on track to making a profit soon -- or else.

That is forcing Net companies to resort to old-economy ways to fix their problems. laid off 2% of its employees last month. ValueAmerica also has announced layoffs. Experts expect consolidation, as weaker companies seek stronger partners. Some industry analysts even predict a few bankruptcies.

''This is round one of the Internet shakeout,'' says Michael Perkins, editor of the venture capital magazine Red Herring.

Many Internet companies are still struggling to generate consistent revenue growth, let alone earnings. But even if the 315 Internet companies Perkins studied could grow revenue 65% a year as Dell Computer has in the past, they still are more than 50% overvalued, he says.

For now, investors may want to stay out of the fray. ''Those Internet stocks are still too expensive,'' says Bonnie Ahrendson, 60, of Ottawa, Ill. ''And I'm not sure where they're going. This is not the time to hop in.''

Behind the burst

This fad ended as most do: Each time investors move to the next hot Internet sector, they trash the previous leaders. That's resulted in a huge divergence between the performance of different industry groups. For instance, the hottest subgroup in the e-Business 50, e-Advertising/marketing/media, is up 36% this year and 281% since June 30.

That's a cyber world of difference from the groups that have fallen out of favor. The biggest victims so far:

* Online brokers were the first to run up, but also the first -- and worst -- to stumble. These companies, which last year were supposed to put old-line brokers out of business, have watched as their stocks have lost two-thirds or more in value.

The e-Financial subindex of the USA TODAY Internet 100 has collapsed 35% since last June 30 and has fallen 6% this year so far.

Not even good news has prodded investors to take another look, it seems. Online trading volume in the fourth quarter jumped 50% from the third quarter -- the fastest percentage spike since the first quarter, says Jim Marks of CS First Boston.

But some individual e-Financial stocks have been crushed even more. DLJdirect is down 77% from its 52-week high, Net.Bank has lost 80% and Ameritrade has lost 75%.

* E-retailers, are behaving like limping steel companies did in the '80s: Their stocks are collapsing. Executives are taking huge restructuring charges and laying off employees. Investors apparently now consider some e-retailers no sexier than glorified catalog sellers.

CyberShop closed its online retailing business this month, a victim of sluggish online sales. As investors soured on its goal of developing into a well-known Web shopping destination, its shares fell 70% to $5 9/32.

CyberShop plans to morph into an Internet incubator -- a sort of publicly traded venture-capital firm that buys stakes in dot-com companies. It aims to mimic highly valued Internet firms, such as CMGI or Internet Capital Group.

Santa Monica, Calif.-based eToys exemplifies the new market. It went public on May 19, 1999, at $20 a share. On its first day of trading, it zoomed 283% to $76 17/32 as investors jumped on the online toy-selling wagon. At its peak, the company had a market capitalization of $7.8 billion, bigger even than Toys R Us, the dominant brick-and-mortar toy retailer.

But it didn't take long for eToys stock to tank as investors soured on its niche. Despite strong top-line growth, eToys stock has fallen $71 5/8 from its 52-week high.

Its market capitalization now stands at $1.7 billion vs. $2.9 billion value of Toys R Us.

EToys' executives have felt the pain. CEO Edward Lenk has seen the value of his 3 million stock options fall more than 80%, from $258 million to $42.7 million. Steven Schoch, the chief financial officer, has watched his options plunge from $62 million to $8.3 million in value.

Schoch insists that although the stock's free fall has demolished the value of his holdings on paper, it won't damage eToys' growth. The company has plenty of cash to keep it running through next year, thanks to a private debt offering last December that raised $150 million, he says.

''A lower stock price just doesn't affect us right now,'' he says, adding that it actually makes it easier to lure new employees. Low stock prices are good news to new employees because their options will give them the right to later buy shares at the price when the option was granted. That, of course, assumes the stock's price will rebound enough to give the new options value.

But some doubt e-retailers will ever regain their cachet with investors. ''E-retailing was a fad for investors,'' says Tim Loughran, professor at Notre Dame University. ''It lasted eight months.''

No one is arguing that all Internet companies are in an extended death spiral. There will be survivors. Web portal, for example, lost three-quarters of its value between April 1 and June 15, falling from a high of $100 to a low of $23. The stock now trades at $75 1/4 after the company was able to jack up ad rates after luring more visitors.

The next bubble to pop?

Which brings us to the last bastion of strength, the so-called B2B companies, which sell to other businesses. ''The same euphoria that was focused on B2C (business-to-consumer) companies 12 months ago is (now) on B2B,'' says Ryan Jacob, portfolio manager of the Jacob Internet fund.

No wonder some struggling consumer Internet companies are trying to reincarnate themselves as B2B Net plays., and Value America have all said they'll start to target sales to other companies rather than just to consumers. and Value America took the additional step of laying off employees.

It's only a matter of time before investors lose interest in B2B stocks, says Youssef Squali, analyst at ING Barings.

Investors already are becoming more discerning. In name and action, B2Bstores has aimed to cash in on the B2B cachet. The company sells cleaning supplies to other businesses on its Web site, which opened in September. But unlike recent sizzling B2B initial public stock offerings, B2Bstores' debut Tuesday barely caused a ripple. The company sold 4 million shares at $8. The stock opened at $10 but by the close was back down to $8 1/8.

''This was an obvious instance of a company that was built to take advantage of the current IPO market,'' says Ben Holmes of

Investors should be wary of companies that try to jump on the latest investment trend, Jacob warns. ''Investors need to be very careful of companies trying to portray themselves as B2B hoping the euphoria will rub off on them,'' he says.

Even if the euphoria does rub off, it usually doesn't last long. Shares of Rhythms Netconnections, once a darling with investors eager to buy shares of network gear makers, are now 59% off their 52-week high.

In fact, only three e-Business 50 stocks are at new highs: RealNetworks, Juniper Networks and Network Solutions.

E-Business stocks will inevitably face the same kind of pressure that crushed many e-Retail stocks, Squali says, as more competitors crop up and as revenue growth slows. ''The growth will slow down as these companies mature,'' he says.


-- Farouk Madjurian (, February 18, 2000


"No one is arguing that all Internet companies are in an extended death spiral" Pretty final sounding.

Unusual to see such an article from the normally bubble-blind USA Today.

This trend continues very long, I'll only have three questions:

Got Preps?

Got Glock?

Got God?

Gonna need all three...

-- Powder (, February 18, 2000.

Hah! Some popped bubble. The NASDAQ will probably hit another record high next week. The DOW on the other hand is weakening fast as evidenced by todays number of record highs/lows and the ratio of decliners to advancers.

I have confidence though that rising interest rates and higher oil prices will put a dampener on all the markets. Also something else will probably come out of the blue and that will be the pin that pops the bubble.

-- Guy Daley (, February 18, 2000.

FM --- Great post. Thanks

-- Dana (, February 18, 2000.

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