Wednesday, December 30, 1998 Published at 17:50 GMT
Business: The Economy
Anyone for Internet shares?
eBay is the Internet's stock market darling
In a small monastery in Kentucky, 75 Trappist monks labour daily to produce cheese, fruitcake and bourbon fudge. They live in the Abbey of Gethsemani and to raise funds they sell their products to visitors. This year they tried to do things different - they went online at www.monks.org. Brother Anselm, head of the abbey, describes the result: "Well, we're out of food".
This is not the miracle of Gethsemani. Across the United States, Internet shopping has taken off big time, and Christmas has been the season to prove it. Fourth quarter figures for online sales are estimated to reach $3.5bn - three times the size of 1997 and far beyond the estimates of market analysts.
Online retailers claim that many of their customers are first-time shoppers. This indicates a quickly growing market and experts from the management consultancy Boston Consulting Group predict that the online market will grow to $13bn for the whole of 1998. Compared to the conventional retail market this is still peanuts, but investors appear to be confident that the Internet is the future.
The result has been an extraordinary boom - and occasional bust - of share prices of companies connected to the Internet. The big winners are the so-called ".com" firms, loss-making Internet start-ups that try to raise money on the stock markets. Not every initial public offering is successful, but those that make it see their share price taken to spectacular heights.
Take eBay, the online auction house, which some unkind observers call the Internet flea market. It offered itself on the stock market on 24 September 1998 for $18 a share. Three months later the shares in the San Jose, California-based company trade at around $290 - a staggering rise of 1,600%.
The company still has to make a profit. Its price to earnings ratio stands at 9,279:1. Traditional companies that are well-run and popular boast a "p-e ratio" of maybe 20 or 30, i.e. their market capitalisation is 20 or 30 times higher than their earnings. Despite this eBay has a market capitalisation of $7,562,835,250.00.
eBay is the top-performer, but not the exception. Ubid, another online auctioneer, has seen its shares rising by some 700%. Broadcast.com, which offers live and on-demand audio and video programming sells advertising space on its web page, has seen its share price rise from $18 to nearly $100 - a 425% increase.
The Internet veterans are doing well too. They have been in the web business for two or three years and investors are pouring money into shares of Yahoo and America Online. Another favourite is the Internet bookshop Amazon.com, which is expanding fast and one of the few companies that earn money on the web.
Companies that actually manufacture goods and make a profit can only dream of being such stockmarket darlings. The online midgets of two years ago suddenly find themselves overtaking the traditional media giants in size.
This is enough incentive for traditional companies to put the Internet badge on their lapel whenever possible. Zapata Corporation, for example, a fish oil processor whose co-founder is US President George Bush, wants to transform itself into an Internet service and is currently running two web magazines.
The move was initially widely ridiculed, but when the company announced on Christmas Eve that its plan to become "one of the largest Internet companies in the world" was back on track, its share price nearly doubled.
So why do investors like these Internet stocks?
Most analysts are at a loss. They say that .com companies follow their own rules, far removed from traditional price-earnings expectations that are the benchmark of 'normal' corporations. Others contend that the market for Internet firms is still "immature", and that the asset bubble will soon collapse with prices settling at more realistic levels.
Whatever the explanation, there appears to be a lot of money out there ready to be invested into any company that claims to have a connection with the Internet. The result are violent share price movements.
The price of shares in Theglobe.com, for example, rocketed from $9 to $97 in one day before closing at $63. The company is currently trading at around $37 per share. Internet service provider AvTel one day saw its share price rise even more, by nearly 1,300% to $31, when investors misunderstood a press release about the introduction of a new digital subscriber service. AvTel shares are now trading at just over four dollars.
Such price movements make it a tricky market to ride. Chances are that investors find themselves having bought at the wrong moment. Just after Internet stocks had scaled new heights on the days after Christmas, they fell sharply again - until the next rise.
And not every Internet stock is a sure bet, because there are losers too. Many new shares offerings flourish only briefly and soon crash into oblivion. Just like in the 'real world' Internet consumers are opting for strong brands. This suggests that only a few market leaders will survive the fight for space on the computer screens of Internet consumers.
One thing is certain - today's share prices are little indication as to who the winners will be.
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