Dot-Coms: Down But Not OutPublished: October 16, 2000 in Knowledge@Wharton
First some facts: TheStreet.com Internet index, composed of 24 key stocks, is down about 55% since March … Amazon.com trades around $32, down from $113 late last year … Priceline.com, which hit $104 in the spring, trades around $6.
And now for the opinions: What lies in store for the Net economy?
To explore that question, Knowledge@Wharton and CNET News.com co-sponsored a panel discussion in San Francisco on Oct. 4, moderated by Wharton Finance Professor Jeremy Siegel and titled "Dot-coms: Down and Out?". Panelists included Henry Blodget, first vice president and Internet coordinator at Merrill Lynch; Michael D. Cohen, financial analyst and portfolio manager at Alpha Analytics; Mark Goldstein, chief executive at Kmart subsidiary BlueLight.com; Thomas McManus, managing director, equity portfolio strategist at Banc of America Securities; and Ann Winblad of the venture capitalist company Hummer Winblad Ventures.
Siegel opened the debate with a question as to whether technology stocks will stage a recovery in the near future. The panelists’ general response: yes, there will be some big winners eventually, but no, there won’t be a widespread rebound soon.
Winblad predicted "a lot of sorting out" over the next few months –as companies rush to get out the bad news now rather than doing it in January - that will continue to hurt even the relatively sound companies such as Oracle, which is down more than 30% in five weeks. Ultimately, the survivors will be a "different set" of companies from those known as the high-priced stocks early this year, she said, adding that many investors will continue to stand on the sidelines for the time being, keeping demand for Internet stocks low.
Blodget, too, argued that good companies like Intel, which has fallen to about $40 from nearly $76 just over a month ago, "are being thrown out with the bathwater." Many computer companies suffered in the consolidation of the 1980s, he said, but Microsoft, Intel, Dell and some others emerged as giants that brought shareholders wonderful profits. That is likely to happen with Internet stocks as well, though it’s too soon to predict the winners, Blodget said.
"I think what [investors] are saying is, ‘Slow down a little bit,’" commented Goldstein. Eventually, he noted, today’s strong companies will probably emerge even stronger "and the weak probably won’t make it." Cohen agreed that hidden in the carnage are many strong companies with stocks that will come to look like bargains at today’s lower prices.
In the meantime, Internet stocks will continue to make extreme swings, several panelists predicted. The high cost of oil, rising interest rates and a slowing economy would make Internet investors jittery, Cohen pointed out, in part because worsening market conditions are especially bad for stocks that are highly speculative. In addition, said Blodget, the Securities and Exchange Commission’s new "Full Disclosure" regulation, requiring companies to make public any information revealed to Wall Street analysts and big investors, could make executives reluctant to speak freely about corporate matters. If executive insight is harder to come by, investor sentiment may swing more wildly on speculation, causing stocks to gyrate, he said.
Not long ago, said Siegel, companies waited to become profitable before going public, while many of the recent Internet IPOs came from companies reporting massive losses. "The nature of the IPO market is just so dramatically different," he noted, referring to what Wall Streeters, justifying high stock prices in the absence of profits, have called the "new paradigm" for valuing stocks.
The panelists agreed that the collapse of Internet stocks is causing many analysts and investors to rethink this paradigm, and to look again at fundamental corporate data. "Investors are starting to focus on results," said McManus.
Many Internet investors "are not trained to look at fundamentals," Winblad added. In the absence of profits, which can be slow to come for companies that must spend heavily to get started, it’s difficult to know how to gauge success. A few years ago, the typical IPO involved a company that was six years old, while many more recent IPOs came from companies in business only two years. An investor buying into a two-year-old company has very little to base a judgment on, Winblad said, adding that the Internet stock slump will probably cause new companies to hold off IPOs until they are four to six years old.
Last year, added McManus, investors tended to bid stock prices up on the basis of short-term sales growth, without looking at the more important question of whether a company could sustain its growth. That attitude is likely to change now, he suggested. "We’ve underestimated the value of professional stock picking. People need to go back to looking at mutual funds."
Siegel predicted that, current problems notwithstanding, the Internet will inevitably be an enormous, revolutionary industry. McManus agreed, but cautioned there could be decades of turmoil ahead, making it a very risky sector for investors. "One thing that still amazes me is the extent to which people are willing to buy lottery tickets.
Investors, coming down after the euphoria of the late ‘90s, are likely to evaluate Internet companies with a colder eye, Winblad said. Investors will give Internet companies the same evaluation they give Old Economy companies. "If something looks like a dead company, smells like a dead company and acts like a dead company," she said, "it’s dead."
Winblad criticized "theme park" investing – as opposed to sector-based investing - in which investors just look at the category into which a company falls rather than researching the merits and potential competitive advantage of the company itself.
At one point during the debate, Siegel announced the results of a poll asking the audience the following question: Which company’s stock will perform the worst over the next 12 months, Amazon, Yahoo or AOL? The answer: Amazon, by 75%, followed by Yahoo with 16% and AOL with 9%. Yahoo seemed to be a favorite of several panelists, receiving strong praise for its strong management team and focus on profitability.
Winblad in fact was somewhat bullish on the future of the technology sector overall. "The edges of the Internet are wobbly….and it may be harder to get on the map," she said, "but here are lots of opportunities to build new [products and services] that are needed today, let alone tomorrow."
To watch an archived version of this panel discussion, which was webcast on Oct. 4, click here. (Note: It requires Windows Media Player)