Internet stocks regain footing, but remain risky

Sector is here to stay, but consolidation is likely

August 22, 1999|By Amanda J. Crawford

BELEAGUERED Internet shares showed renewed life last week after closely followed Merrill Lynch analyst Henry Blodget set a fire under the sector with upbeat comments about a group of bellwether stocks. Blodget raised his ratings for portal Yahoo! Inc. and retailer Amazon.com Inc., saying they were among eight stocks that should perform well in the fourth quarter as Web sales heat up in the fall and the holiday season.

The others were America Online Inc., book retailer Barnesandnoble.com Inc., media company Excite@Home Corp., eToys Inc., software provider Inktomi Corp. and Lycos.

"Investors are using this [Blodget's comments] as an excuse to get back in," said Conley Turner, an analyst at Wall Street Strategies.

What's the outlook for Internet stocks, which are still far below their April highs? Will the sector regain its allure? Or are investors becoming wary of their volatility and the lack of profits at many of these companies?

Alan Ackerman

Executive vice president at Fahnestock and Co., New York

Earlier this year, there were a number of analysts who thought the Internet might be looked upon like a flash in the pan, here today, gone tomorrow. But a number of companies have not only improved their numbers of subscribers, but on rare occasions have produced earnings.

My sense is we are at the very early stages of a meaningful explosion in a number of areas within the Internet itself. Over the next few years we'll see not only growth in the industry, but a dominance of a handful of companies that are now building their capability by virtue of internal growth and acquisition.

John Robb

Internet analyst and president, Gomez Advisors Inc., Lincoln, Mass.

Generally, the market is soft right now because the investment professionals that provide the parental supervision have gone on holiday. Things tend to get more serious when September rolls around.

In the long term, the Internet is going to be huge. Every piece of analysis that I have seen indicates that the total value of Internet companies will be substantially larger than the total value of PC-related companies. But it is hard to predict which stocks will actually gain the attention of investors. People are going to have to tread lightly in the Internet sector. There is potential for great loss -- also for great gain -- but there are a lot of companies that are overvalued.

I expect there will continue to be volatility and the sector will continue to be overvalued in some places. The sector cyclically will come in favor and out of favor as it exceeds the comfort level of investors. Over the next several years, the Internet will continue to grow and there will be Internet novas and Internet Titanics. It's going to push the envelope for what people feel comfortable with in terms of valuation.

Michael Arellano

Industry analyst, Degas Communications Group Inc., New York

When people in general have a positive view on Internet stocks, the market goes up, and when they start to get a little fearful, the market goes down. It tends to be a volatile sector because it is valued rather highly compared to the rest of the market.

So people start to get nervous when they think that they're at the top of the bubble, so to speak. They're buying in at the peak and there is not much upside opportunities and a lot of downside risk.

Maybe now people are starting to sense there was a little too much hype behind some of these stocks. There are more Internet companies to invest in now, too. Before, a lot of companies kind of had the market to themselves.

There will be winners and there will be losers. The bottom line is the market will fluctuate.

Alfred Goldman

Chief market strategist, A. G. Edward & Sons Inc., St. Louis

The Internet industry is here to stay. It has and will continue to remake the way we all market, buy and sell. But the fantastic bubble that rose like no bubble I have seen in 38 years, like a giant wave taking everything with a ".com" in its name up, up and away, is over.

What will now happen, in our opinion, is that the marketplace has and will stay much more selective. Investors will not buy shares of a company just because they have a ".com" in their name. We look for far much more discrimination and critical looks at a company's fundamental prospects.

As in prior bubbles, like the biotechs of the early '90s, if 50 Internet companies went to the sky, three to five years from now four or five will still be in business and doing well, but the rest will have disappeared.

Thus the way to participate in the dynamic growth of this industry is to buy only the best-managed companies, with the strongest solid growth prospects, and don't try to trade them on a very short-term basis.

The sector won't regain its allure, but individual companies in the sector will. But the up, up and away for anything in the group is over. People hopefully have learned their lesson. Part of this is caused by the fact that this is an industry with a classic oversupply. The marketplace will continue to separate the wheat from the chaff, the good from the bad.

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