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Tuesday, 18 April, 2000, 17:32 GMT 18:32 UK
The great web share 'clear-out`

As investors flee technology stocks and firms find it harder to raise capital, BBC News Online's Tim Weber investigates whether internet shares are still a good investment.

It's been a lousy few weeks for web investors. Their bets on "TMT" - shares in technology, media and telecoms companies - have all gone horribly wrong.

If anything the gyrations ... have created what we believe is a more realistic valuation scenario going forward.

Walter Sousa, GE Asia Pacific Capital Technology Fund
Their favourite stock market, the Nasdaq, dropped as much as 30% since reaching a historic high of 5,048 on 10 March, before recovering slightly. Europe's technology markets, the Neuer Markt, Nouveau Marche and London's Techmark, have not done much better.

But the series of short, sharp shocks - like the 355.49 points fall of the Nasdaq on 14 April - has done little to deter investors.

For a day or two, brokers reported a mood of "controlled panic", only to see people flock back into the market again.

So was the market tumble just a speed bump on the road to new, untold technology riches?

'Additional weakness'

Share price development of
German banking giant West LB, for one, is sceptical, giving the technology sector a meagre "neutral" rating, while Wall Street stalwart Merrill Lynch predicts "additional weakness" for technology shares in the days ahead.

But then there are technology stocks and there are technology stocks.

This will take time to heal.

Bob Dickey, Dain Rauscher Wessels
Some firms have seen their market value halved in the space of a couple of days. Petrified investors could see their share portfolio plummet by 80% within a month.

However, despite the carnage the shares of quite a large number of tech firms are still doing well - relatively well, that is.

Share price development of Arm Holdings
The world's second-largest internet service provider, Germany's T-Online, for example had a very successful stock flotation, despite tricky market conditions.

Chip makers like Arm Holdings, Intel and Xilinx all emerged with relatively little damage.

The big 'clear-out'

So what will be the result of the stock market gyrations?

For once, it will produce a big clear-out.

The world of e-commerce has turned into a big jungle, with tens of thousands of web sites vying for attention and too many companies competing for the same customers.

Share price development of Baltimore Technologies
Market analysts have compared the stock market chaos to a forest fire that will help clear out this jungle, and create space for fewer but stronger web companies.

This will make life easier for both investors and consumers.

The trouble for investors is that it is not obvious yet when the clear-out is over and who the survivors will be.

Value investing - internet style

Venture capitalists will now be more careful examining business proposals. The wall of money that hits web entrepreneurs should shrink in size.

And investors will - or should - be more circumspect before betting on "hot" new IPOs - the famed initial public offering of company stock on the market.

A number of lower quality stocks ... had simply become caught up in the frenzy and were clearly overvalued.

Chris Bell, Framlington NetNet Fund
Old economy values are suddenly back in vogue. A in a firm's name does not guarantee stock market success anymore.

Gone are the days when technology firms proved their prowess by boasting the size of their losses.

Revenue, earnings and profits are benchmarks once again, even though investors do not necessarily insist on getting old-fashioned things like dividends.

Share price development of Psion
Chris Bell, UK fund manager with the Framlington NetNet Fund, says that "a number of lower quality stocks ... had simply become caught up in the frenzy and were clearly overvalued".

The market falls, he says, "will prove to be the clearout which will encourage investors to become more discerning about which stocks they buy, rather than chasing any new issue for short term gain".


Stocks are either tremendously overvalued - i.e. tech - or they are priced for recession - the remainder of the market.

Richard Bernstein, Merrill Lynch
The internet bubble had driven many "value investors" to despair. The markets seemed to ignore companies with healthy balance sheets and channelled their money into firms with cool names and dubious business models.

The 'market correction' should have persuaded many investors to look for companies with a good revenue flow.

One example is Just2Clicks, a web site running business-to-business exchanges. In recent months its share price was hammered, but when chief executive Karl Watkin told BBC Radio's Today programme that his firm expected "very substantial revenues ... in the very near future" his firm's share price shot up.

Share price development of Just2Clicks
The magic word is "business-to-business".

Online retailers have discovered that it takes more than snazzy web site design to run a successful business.

Long delivery times and poor customer service have sunk or seriously damaged the reputation of many "business-to-consumer" internet firms.

Business-to-business e-commerce (b2b) is a different proposition. Most experts agree that the internet can become the market place that allows companies to buy and sell cheaper and more efficiently.

As b2b e-commerce has become fashionable, online retailers have rushed to convince investors that their business plans contain a b2b component.

Unwary speculators could fall into this trap.

Funny money

The share price plunge has put an end to another market distortion.

Share price development of QXL
Web firms were able to go on a spending spree for staff, hardware and competitors by using their inflated stock as currency.

This is now over. Richard Bernstein of Merrill Lynch warns that the current "bear market" will hurt the earnings growth of tech companies.

He says that "virtually no stocks trade at fair value.

"They are either tremendously overvalued (i.e. tech) or they are priced for recession (the remainder of the market)", he warns.

If his assessment is right, the markets are going to be volatile for some time to come.

Bob Dickey, market analyst at Dain Rauscher Wessels, says that the tech crash "will take time to heal".

He says that although there are "bargain hunters", but that too many "investors ... were hurt very badly, so it's not likely that the market will regain its enthusiasm very quickly".

The losers are the investors who hoped to make a quick buck by buying shares in much-hyped retailing web sites like or auction site QXL.

And spare a thought for Silicon Valley's internet millionaires, who have seen the value of their stock options swing so wildly to the point where they are not sure whether they can afford a Lexus or BMW as their second car.

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See also:

14 Apr 00 | Business
A crash or a 'correction'?
17 Apr 00 | Business
World market roller coaster
17 Apr 00 | Business
Net giant defies shares gloom
15 Mar 00 | Business
Floating out of favour?
30 Mar 00 | Business
European internet fever cools
31 Mar 00 | Business
Tech stock trouble
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