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Tuesday, November 24, 1998 Published at 18:19 GMT

Business: The Company File

Internet share fever

Internet stocks have reached breathtaking levels

Internet fever has gripped the US stock market again.

Stocks are now changing hands at incredible prices.

Internet shares that join Wall Street roar ahead when they start trading as new investors rush to get a piece of the action.

Just the mention of the Internet in a trading statement can cause stock prices to soar.

[ image: The Internet could transform our lives]
The Internet could transform our lives
Internet stocks have become the new craze as investors look to cash in on the explosive growth of the worldwide computer network which promises to transform the way we do business and live our lives.

The amount of e-commerce, or business done over the Internet, is forecast to rise dramatically in the next few years.

Private investor power

Private investors, who have become the mainstay of the stock market's remarkable resurgence over the past few weeks and years, have piled into Internet stocks.

The move towards online broking, which provides instant access to the US stock market, has contributed to this tremendous rise.

The prospect of mergers sweeping through the industry, as Internet protagonists attempt to build up market shares, has also added to the excitement.

[ image: Are Internet stocks worth it?]
Are Internet stocks worth it?
America Online's announcement that it is swallowing Netscape in a deal which involves another Internet heavyweight, Sun Microsystems, has buoyed share prices.

But the history of financial markets has proved in the past that what goes up, usually comes down as former stock market stars crash to earth.

Analysts, who have rarely seen anything like the current feeding frenzy for Internet stocks, are already questioning whether the Internet bubble will soon burst.

Stunning stocks

The rise in some stocks has stunned Wall Street watchers.

The examples of hot stocks are numerous:

  • Internet bookseller shares have been rising rapidly in recent weeks, helped by news that it had signed a deal with Microsoft which would enhance its presence in the online music market. The shares have leapt an amazing 800% from their low within the past 12 months.

  • Shares in EBay, which conducts online auctions for anything from antiques to computers, have exploded since it came to the market valued at less than $500m. The group is now worth more than $5bn.

  •, a firm which helps people create web pages and only came to the market earlier this month, is now trading at around five times its flotation price.

Others like Yahoo!, the leading search engine which helps Internet users find their way around the worldwide computer network, have also leapt to new heights.

Some Internet stocks are now larger than many traditional industrial and retail giants.

The boom has spurred the US stock market to new heights. It has roared back in the past few weeks, rising more than a fifth.

It is all a far cry from a few months ago when fears of an economic meltdown spread doom and gloom across Wall Street.


But there are also examples of how overheated the Internet market has become. US communications group Avtel is a case in point.

Earlier this month Avtel said it planned to introduce a new system in Santa Barbara, California, which allows customers to access the Internet quickly and talk on the phone at the same time.

However, Avtel does not own the technology and it is only to be introduced, initially at least, in a very small area.

But word got round that Avtel was involved in the Internet and its shares rocketed.

The stock soared from $3 to $31 on the Nasdaq exchange, which specialises in technology stocks, a staggering increase of almost 1,300%.

The sharp rise caught the attention of the authorities at the Nasdaq exchange. They halted trading until Avtel could clarify its position.

It did and the stock fell back to $3. It subsequently regained some of the lost ground, but still nowhere near the peak of $31.

Getting burned

Investors who got in when Avtel shares were on fire got badly burned.

That is not to suggest that that all Internet stocks are overvalued, but it does appear that investors have got caught up in the hype surrounding the sector.

The stocks, by their very nature, are risky.

Many leading companies, let alone newer, smaller entrants, have yet to make a profit.

Defying gravity

So stock market valuations are not based on earnings, but rather the potential to build up its Internet business and profits in the future, sometimes far into the future.

Whether Internet stocks will be able to defy gravity for much longer is the question on every investor's lips.

The answer will have important repercussions for millions of private US investors and the future of the wider stock market.

A collapse in confidence in Internet stocks, if it does come, would rock the world's financial markets.

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