(c) 1995 Copyright Nando.net
From Wire Reports
(Nov 3, 1995 - 09:54 EST) - Wall Street is in the throes of Internet
mania. Or is it Internet madness?
Investors have poured into Internet-related stocks the past couple of
days, pushing some Web darlings such as Spyglass and Netscape
Communications to dizzying new heights.
"People are blindly investing in anything that says Internet," said
Willian Bluestein, an analyst at Forrester Research in Cambridge,
Mass.
"Everyone wants to buy into the craze," says John Segrich, who works
with mutual-fund investor Mario Gabelli.
Some of the biggest jumps this week have come in shares of Spyglass,
which have soared around 70 percent for the week. Netscape
Communications gained about 10 percent Thursday alone, as did UUnet
Technologies. Those gains followed big jumps on Wednesday, leaving
other highfliers up 21 percent to 41 percent since last Friday.
What is the big stampede all about? During the past week or so, some
of the highest-profile, highest-flying Internet stocks have actually
reported profits, a development the Street wasn't expecting until next
year at best.
Investors' confidence has also been fueled by a research report that
came out Monday from Dun & Bradstreet's Nielsen Media Research unit,
which showed that 24 million people in the U.S. and Canada use the
Internet -- more than had been thought. The spotlight was also on
Internet stocks after overflow crowds showed up at an Internet trade
show in Boston, followed by another technology conference in Monterey,
Calif.
The earnings surprises began popping up last week, beginning with
UUnet, which reported a third-quarter profit of two cents a share Oct.
23, while the Street had expected a breakeven quarter. On Oct. 24,
Netscape reported a quarterly profit of four cents a share when
analysts were expecting a seven-cent loss.
On Wednesday, the trend became even clearer when Spyglass, which
provides Web-browsing software, reported fiscal fourth-quarter net of
20 cents a share, way above Wall Street's forecasts of three cents to
five cents.
One less-obvious name swept up in the Internet rally was Intuit, the
personal-finance software company, which said Oct. 19 that the 1996
version of Quicken for Windows will offer Internet access. Intuit
shares rose $4 on Thursday, on top of a $6.75 gain Wednesday, and now
trade at around $82.75.
"The reason Intuit's moving up is the realization that if you had to
do the banking industry over again, you wouldn't use bricks and
mortar," said Neal P. Miller, manager of Fidelity Investments' New
Millennium fund. "I think the size of this Internet thing is just
dawning on everyone," he said.
Neil Weintraut, an analyst who follows Internet stocks for Hambrecht &
Quist in San Francisco, said, "Money managers are realizing that there
is tremendous strength behind this. It's not just a technology chasing
a marketplace."
The lightning runup has pushed some of the stocks to valuations that
would make anyone's head spin. Netscape, for instance, is trading at
about 327 times 1996 earnings estimates of 30 cents a share. UUnet is
trading at 248 next year's consensus estimate of 26 cents, while
Spyglass is trading at a comparatively reasonable 141 times 1996
estimates of 44 cents a share. (The overall market trades at roughly
12 times next year's net.)
That is enough to discourage some well-known technology investors from
coming along for the ride.
"They are trading at insane valuations. It may be a little late to
jump in," said Paul Wick, a technology money manager at J&W Seligman.
Graham Tanaka, another high-tech manager in New York, adds, "I think
this is a real industry and it will be huge. But we can't be sure who
the players will be," he says. "We'll bide our time and get another
shot."
There are plenty of risks. For instance, competition is likely to be
more fierce than many share prices would suggest. In the software end
of the business, powerhouses Microsoft and Oracle are aggressively
pushing Internet software.
Internet access is coming from a range of major players, including
national telephone companies such as AT&T and MCI Communications,
regional Bell operating companies and cable-TV operators. Many of
those companies already have much of the infrastructure in place to
offer rock-bottom access and could squeeze out other access firms that
lease networks.
But some investors say it is possible to limit risks among the group.
"I think there are safer ways... to play this," says Gabelli's Mr.
Segrich. For instance, he believes the software companies like
Netscape, Spyglass and Quarterdeck are some of the diciest plays.
"There's not much barrier to entry," he says.
There is also more potential for gains because software margins are so
rich. Netscape has doubled since its initial public offering in
August, and Spyglass has nearly tripled since its June IPO.
For people who want to invest in Internet companies, there is "too
much demand and not enough supply, which means these stocks may
continue to go up," said Brian Oakes, vice president at J.P. Morgan
Securities. "The rising tide is raising all boats," said Lou Kerner,
an analyst at Merrill Lynch.
The group's rise has been so eye-catching that some of the stocks are
gaining credibility with investors who normally steer clear of
speculative frenzies. "You have got to be impressed with things like
Netscape. We don't want to miss the big elephant," said Elizabeth
Bramwell, of Bramwell Capital.
Most investors agree the current valuations on these stocks are lofty.
What investors don't agree on is exactly how to value Internet stocks.
After all, the industry is still in its infancy. "Everyone's looking
for a benchmark," said J.P. Morgan's Mr. Oakes. "People aren't sure
what the benchmark could be."
For access providers, investors tend to look at subscriber numbers.
Access firm Netcom On-line Communication Services, for example, has
roughly 230,000 members and a market capitalization of approximately
$622 million. Each subscriber, then, is worth $2,600. But America
Online, which has a market capitalization of $4.4 billion and 3.5
million subscribers, has a subscriber value of more than $1,200.
Almost any way you slice it, these stocks aren't cheap. "If you look
at these stocks on a cash-flow basis, you need to be projecting out 20
or 30 years to get to these valuations," said Gabelli's Mr. Segrich.
He believes some of the safer ways to play the trend are equipment
companies like Cisco Systems and Bay Networks, not to mention Cascade
Communications. "They're going to do well no matter what," he says.
So what happens from here? Hambrecht's Mr. Weintraut believes the good
times will continue to roll. "I believe there's more room to go," he
says.
Others think the past week's wild ride is winding down. "You can't run
up 10 points a day without a correction," Mr. Segrich says.