Investor optimism remains high for Internet stocks

Dunstan Prial

Thursday, Aug. 5, 1999 | 11:25 a.m.

NEW YORK -- A reversal of fortunes for formerly high-flying Internet stocks that began as a gradual drip last spring has turned into a flood, as a huge selloff in the sector continued to drag down broader markets today.

The turnaround has helped plunge the technology-laden Nasdaq Stock Market into a so-called correction, generally defined as a 10 percent decline from a market's high point. On Wednesday, the Nasdaq closed down 11.3 percent from the all-time high reached July 16 of 2,864.48.

Continued weakness among Internet stocks today pulled the Nasdaq composite index down another 49.19 points to 2,490.90 in midday trading. Internet company Yahoo! Inc. fell $5.50 to $115.50 while services provider America Online Inc. fell $6.75 to $88.68_threequarters(c).

Considered almost invincible early this year, online stocks appear to have reached their peak in April, when the luster began to wear off for investors. The 40-stock Dow Jones Internet Index has shed more than 40 percent of its value since it hit an all-time high on April 13.

Adding to the pain, investors are snubbing new stock offerings from Internet firms. The market for initial public offerings, or IPOs, of Internet stocks had seemed virtually bulletproof through the first half of 1999.

But despite the jitters that the declines have spread across Wall Street, there are some investors who are welcoming the slump as an opportunity to buy these stocks at levels far below the astronomical prices of this spring.

"Something like this had to happen, given the large number of Internet companies that have filed for IPOs recently. It's healthy," said Ken Fleming, an analyst with Renaissance Capital Corp., a financial research firm in Greenwich, Conn.

"The underlying sentiment remains 'come back, come back' because people love to believe in the potential of the future, especially Americans," said Steve Harmon, a San Francisco-based Internet analyst and money manager.

Nonetheless, sharp declines are scary for investors who bought when stocks were peaking.

The retailer Amazon.com, for example, hit an all-time high of $221.25 April 27. Its price today hovered around $89, a 60 percent decline.

Henceforth, investors may have to be more choosy.

"We all know the Internet is here to stay and there will be significant survivors. We just don't know who those survivors will be," said Edmund Cashman, co-head of capital markets for Legg Mason Wood Walker, a Baltimore investment bank.

Finding those survivors won't be easy. Cashman noted that the stocks of most Internet companies continue to trade at prices that have no historical precedence. Traditional methods of placing a value on a company's stock have been thrown out the window as investors have increasingly gambled solely on an online company's potential to earn money, he said.

Shares of the brokerage firm Charles Schwab Corp., which has a big online business, have traded recently at a price that's 100 times the company's annual earnings per share. By comparison, the shares of conventional brokerage firms such as Lehman Brothers and PaineWebber generally trade at prices that are 15 times the company's earnings.

The situation is even more surreal for the vast majority of Internet companies that have recently made their first public offering of stock because most of those companies are at high levels even though most have never earned a profit, Cashman noted.

The weakness in recent IPOs indicates that investors are starting to get selective.

On Tuesday, the stocks of four Internet companies sank in their debuts on the Nasdaq Stock Market. Prior to Tuesday, of the dozens of Internet companies that have completed initial public offerings in the last year, just three failed to make gains in their first day of trading.