Internet stocks: April 27, 1998 issue of New Thinking

April 27, 1998 New Thinking:
Internet stocks

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April 27, 1998

Internet stocks

By Gerry McGovern

In the last couple of months, Internet stocks have gone crazy. Even more crazy than what has happened to Internet stocks in the last couple of years.

Last week, I had a request from a friend who has never even used a computer, let alone been on the Internet. He wanted to re-mortgage his house and buy some Internet stocks. I sat him down and told him in the friendliest possible manner that he was crazy.

It’s not that I don’t believe in the Internet. I have wagered everything I have on it. I believe that long-term the Internet will keep growing and growing. However, some of what is happening today is crazy even by crazy standards. And certainly, someone who has never even used a computer should not be thinking of re-mortgaging their house and putting their family in potential peril just to invest in Internet stocks.

If only he had re-mortgaged his house two years ago and invested in Yahoo!

Having launched at USD13, Yahoo’s stock moved from a closing price of USD69.25 in December 1997 to USD103.87 on April 2nd 1998. By mid April it was hovering around USD120. These stock values are interesting. Basically, Yahoo, with a turnover of roughly USD100 million is valued as if it had a turnover of USD4 billion.

Yahoo! Is not the only stock that is very much valued on future potential. Stocks for Amazon, Egghead, Preview Travel, General Magic, SmartServe Online and SportsLine have all done extremely well in recent months.

Some believe that Internet stocks are way over-valued, future potential or no future potential. Forbes writer Penelope Patsuris quotes Eaton Vance Information Age fund (ETIAX) co-manager Duncan Richardson: "Add up the market caps of all the Internet companies and compare that to their combined revenues," she quotes him as saying. "You'll find that the market-value-to-sales ratio for the Internet sector is between 7 to 10 -- that's sky-high."

“To put Richardson's data in perspective, he adds that the market-value-to-sales (MV/S) ratio for the S&P 500 is just 1.74,” Patsuris explains. “A solid company with a proven track record like Warner Lambert is at five times revenue; Home Depot is two times.”

Certain Internet stocks are over-valued but it is impossible to over-value the Internet. What Wall Street portrays is the optimism for a new age with untold possibilities.

The continued, almost unparalleled growth of the American stock market, and in particular that of Internet stocks, has in my opinion a number of solid underlying fundamentals:

Technology is getting faster, while at the same time getting cheaper, thus fuelling a continuous curve of economic growth and productivity.
More and more people are investing in the stock market. This is because (a) people are becoming more knowledgeable, (b) people are becoming more independent, realizing that no company or organization can offer them life-long employment or security.
The Internet in itself is changing the nature of stock trading because (a) it is allowing a much wider range of people to access information on and trade in stocks. (b) it is making it truly cost-effective for small trades to occur, thus allowing a wider section of the public to trade (c) it is creating an environment which allows smaller companies to come to market in a cost-effective manner.

Are Internet stocks a good buy? If you’re into risk and adventure. Is the Internet a good buy? If you’re into the future.

Gerry McGovern

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Are Internet stocks a good buy? If you’re into risk and adventure. Is the Internet a good buy? If you’re into the future.