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Sunday, 8 October, 2000, 17:37 GMT 18:37 UK
Investors watch clearout
HomeSeekers web site screen shot
HomeSeekers' auditors question the firm's ability to secure additional funding
For many internet companies, the last quarter of the year 2000 could turn out to be make-or-break time.

Given the extreme volatility [of share prices] and valuations, we still consider most pure play internet stocks unsuitable for investors with average risk tolerance

Henry Blodget, Merrill Lynch
With share prices of technology firms plummeting, investors are reluctant to keep funding the costly fight for market share.

As a result, the roadkill on the information super highway of e-commerce is piling up. Among the latest victims - or close to death - are:

  • shopping site Productopia,
  • teeny community site,
  • internet real estate site (auditors issued a warning),
  • jewelry site, and
  • WebHouse Club, retailer of petrol and groceries for

    Henry Blodget, internet analyst for Merrill Lynch and one of the most influential observers of the market, warned investors: "Given the extreme volatility [of share prices] and valuations, we still consider most pure play internet stocks unsuitable for investors with average risk tolerance".

    Those that are ready to take the gamble, are advised to be very selective when picking their stocks.

    Watching the bellwether

    To measure the overall health of the sector, they will be closely watching the third-quarter results of the darling among internet stocks, Yahoo; they are due to be announced on Tuesday.

    The world's most popular portal is seen as a bellwether of the market, just as Intel's shares are a good indicator for the fortunes of the computer industry.

    When Intel recently said that its earnings would not be up to expectations, the whole sector took a dive, not just the share price of the chip maker.

    This is going to be a pivotal holiday season for most e-tailers

    Scot Melland, Vcommerce
    So far, Yahoo has regularly managed to beat market expectations, showing strong growth of both users and revenues.

    But investors keep asking the same questions: As dot.coms collapse and stop advertising, can Yahoo find enough old economy firms to replace them?

    And will Yahoo always have to rely on advertising revenues, or can it find other ways to make money?

    Investors are wary. In January, Yahoo's shares traded at $250. They have plunged to just over $81 since.


    Yahoo, for its part, can point to one crucial advantage it has on most competitors, a large audience. screenshot has lost its grocery and petrol business
    For others, though, the days of stock market euphoria for dot.coms and making a fortune by floating on the stock exchange are long gone.

    Mr Blodget says: "The internet tide is not rising fast enough to lift all boats anymore."

    About 400 internet firms are currently listed on US stock markets. The Merrill Lynch analyst predicts that 75% of them will never make money and disappear within five years.

    Unforgiving consumers

    Most at risk are so-called b2c ventures - businesses selling goods or services to consumers.

    For them, the coming three months will turn out to be crucial.

    Spending in cyberspace during the christmas season is expected to double, to between $10bn to $12bn, according to analysts at Forrester Research and Jupiter Communications.

    Scot Melland, chief executive of internet services firm Vcommerce, predicts that "the last quarter [of the year] could account for up to 50%" of the business of online retailers.

    If they don't get it right this time, there is little chance that investors will extend them any more money.

    In 1999, several web ventures angered customers by failing to deliver before Christmas Day. This year customers are expected to be unforgiving.

    In the United States, government watchdogs are on stand-by to impose hefty fines should companies fail to keep their promises.

    Online retailers find themselves in a dilemma, with consumers demanding low prices and fast but costly delivery, while investors are getting impatient and want to see profits.


    To make things worse, internet firms are caught in the general downdraft of the technology sector.

    Profit warnings and analysts' downgrades for firms like Intel, Apple, Dell Computers and Oracle have driven down share prices.

    This in turn has been depressing the one currency internet firms used to have plenty: Their own stock.

    And the entrepreneurs have been hit hard.'s founder and vice chairman Jay Walker, for example, is now worth a measly $242m - down from $1.17bn three weeks ago.

    He used $125m of his own money to save Webhouse Club, which was part of the offering, but failed.

    As a result,'s share price collapsed, leaving him and his investors smarting.

    The return of boo

    If the analysts are to be believed, there is just one sector that still promises hefty growth rates - b2b or business-to-business market places, where companies trade goods and services amongst each other.

    Merrill Lynch's Henry Blodget says this industry is still "growing at phenomenal rates", although he warns that the overall sector is "extremely volatile".

    But not everybody is deterred by gloomy forecasts for business-to-consumer web ventures.

    Remember, the much-hyped web retailer that collapsed in May this year?

    Boo is back, and promises to trade again from the end of October.

    Boo's new owner, US firm, promises that "the new will be one of the first sites to harness the power of the internet to create an online community of people who are passionate about style for every aspect of their lives".

    It is now up to investors to believe it.

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