Internet stocks seem more volatile than ever As swings continue, many still unprofitable

Outlook

December 06, 1998|By Mark Ribbing

INTERNET stocks are known for their volatility, but the last few weeks have seen particularly spectacular rises and falls in the industry. On Friday, Nov. 27, for example, shares of Onsale Inc., an electronic commerce company, shot up more than $37 in a single day, only to fall $36 the following Monday. Other Internet stocks have had similarly dizzying trajectories. What is causing this turbulence? Many Internet companies remain unprofitable; how does this play into the valuation of their stocks? Will Internet stocks settle into stability anytime soon, or will the wild ride just keep going?

Frederick Moran

Head of media and communications stock research, ING Barings Furman Selz LLC, New York

The volatility in Internet stocks stems from the fact that this is an on-the-come industry in the virgin stages of its development, with huge growth potential. Market sentiment toward fundamental growth prospects is the big driver.

Volatility is not inherently a bad thing. Internet stocks have been by far the most rewarding stocks on the market for the year to date, even with the volatility.

We still think Internet stocks are the most exciting in the market today -- as long as the fundamentals of growth remain robust.

Dawn Simon

Senior software analyst, Brown Brothers Harriman & Co., New York

You'll see [the Internet sector] take off when there is takeover speculation, merger activity or when sequential growth looks very strong. Lately we've seen sequential growth rates of 23 percent as a sector average. That helps create the momentum.

If you take the momentum from the positive earnings reports this season, and then you add to it the merger speculation [fueled by the America Online-Netscape merger announcement], that really builds momentum within the Internet segment.

Acceptance of the Internet has been so dramatic. It really does warrant investment at this time. There's a really unique opportunity now because there is no standard requirement for disclosure for these companies and there's no standard valuation method.

The best [analysts] in the business don't know how high these [stock] prices should be.

This sector will probably remain more volatile than most because it operates at a very fast speed compared to physical companies. The potential for revenue volatility for a top-line Internet company is just unlike anything we've ever seen.

Ulric Weil

Senior technology analyst, Friedman, Billings, Ramsey & Group Inc., Arlington, Va.

The Internet is a true revolution in the making and investors who have a longer-term horizon with these stocks buy them expecting a long-term payoff down the road. The other group of investors, however, are strictly, literally gambling: As soon as they make some money, they get out of there. There are a lot of them around and a lot of day trading adds up to a lot of volume.

A lot of these companies are small-cap stocks; a group of these gamblers can push the price up dramatically or down sharply in a given day.

The long-term investors know that down the road there will be profit gushers. They're convinced of that. The gamblers don't care anyhow if there are not profits. They're gambling on momentum.

Stability will happen -- but not right away. I see volatility for quite some time.

Pub Date: 12/06/98

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