January 18, 1999
Market's love affair with Internet stocks won't end happily
Wall Street's infatuation with Internet stocks may be one of the century's great tragic love stories. This overhyped, extravagant, convoluted, and ultimately tragic tale of love will probably play out like the marriage of Prince Charles and Princess Diana.
We're still in the early stages. The honeymoon isn't over quite yet, despite some lovers' spats last fall when Internet stock prices dipped -- momentarily -- before shooting up again.
If anything, the stock markets have reaffirmed their love for anything with the word "Internet" connected to it. As I write these words, the Nasdaq index, a bellwether of technology stocks, has just closed at record highs for the third day in a row. Amazon.com is trading at a record-high $138 per share, meaning Wall Street thinks the company is worth more than $20 billion. Yahoo has topped $290 per share. By the time you read this, the stocks no doubt will have moved significantly up, down, or perhaps in both directions several times in succession.
The example of Zapata shows just how frenzied things have become. Zapata, a fish oil and food packaging company, announced last spring that it was going to pursue an aggressive Web strategy, in effect buying its way into the Internet by acquiring high-traffic Web sites. Bingo: Zapata's stock shot up, from around $6 per share to nearly $25, despite the fact that Zapata had no experience with nets other than the kinds used to catch fish.
Zapata made plans to acquire 31 prominent Web sites. Then, in October's stock market retrenchment, Zapata's stock fell and it could no longer afford to make the purchases. It called off the agreements. Wall Street punished Zapata by kicking its stock back to its pre-Internet levels.
But in late December, Zapata announced that it was going to resurrect its Web site acquisition plans. Lo and behold, its stock doubled overnight and now hovers around $12 per share.
If an economist were looking for a controlled study of the effects of adding the word "Internet" to a public company's business plans, Zapata would be it.
Anyone can see where this will end up. Even assuming that the stock markets in general will continue to be bullish (an optimistic assumption given mounting year-2000 anxiety), Internet companies' stock prices can't continue floating along in the stratosphere, unsupported by profits, assets, or proven business models.
Or can they? Individual investors aren't necessarily stupid to invest in the Internet. Far from it. Investing in the Internet today is no more irrational than playing blackjack in Vegas.
Even if you bought, say, Yahoo at what then seemed an extravagant $200 per share, you could still have made money, provided you sold it at a higher price.
Wall Street analysts call this the "Greater Fool" strategy, because it doesn't matter how much of a fool you are when you buy a stock, as long as you can find a bigger fool who will buy it at a higher price. As Obi-Wan Kenobi said, who is the greater fool -- the fool or the one who follows him?
Sooner or later, this period of infatuation is going to come to an end, and once again profits, market shares, and assets will determine Internet companies' stock prices.
When that happens, precious few of today's $20 billion companies will still be worth that much in investors' eyes.
Do you foresee a happier ending? Write to me at firstname.lastname@example.org
or visit my online forum at www.infoworld.com/printlinks.
Dylan Tweney (email@example.com)
has been covering the Internet since 1993. He
edits InfoWorld's intranet and Internet-commerce
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