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The Stock Craze That Won't Die: Internet Mania Heats Up Again

November 11, 1998|TOM PETRUNO

Other investment manias come and go. The Internet stock mania, however, is a bit like having crazy relatives who keep coming back to visit--and each time, their behavior seems more outrageous than before.

Some of the best-known Net stocks soared to new heights Tuesday, amid frenzied buying tied to hopes for a surge in online sales of goods and services during the holiday season.

EBay, the online auction company, rocketed $27.88, or 27%, to a record $130.88 after Goldman Sachs analyst Rakesh Sood made bullish comments about the company's sales outlook and raised his target price for the stock to $150--which is just a 15% move from this point.

The buying wave also swept up the premier Internet search vehicles such as Yahoo (up 7.2% to a record $176.56) and other commercial sites such as online music seller CDNow (up 42% to $12).

The latter also got a boost from K-Tel International's announcement that Microsoft will include K-Tel's online music and video service on the MSN Shopping Channel.

K-Tel may be the best current example of how the Internet mania keeps recurring--unlike so many other industry-specific stock manias of the past, which have typically involved dramatic booms followed by dramatic busts, then lots of reflection about what went wrong.

K-Tel, which made its name over the years selling greatest-hits compilation records, became an "Internet" stock just last April when it announced plans to market its products over the Net. That news sent the stock from $4 to $39 in a matter of weeks.

The panic buying quickly subsided, however, and by early October the stock was back to $6.

With Tuesday's announcement, however, K-Tel soared $11.38 to close at $22.94 on Nasdaq, as 20 million shares changed hands--about twice as many shares as K-Tel has outstanding.

That's two manias in eight months for K-Tel. Most stocks aren't lucky enough to experience a mania even once.

Which begs the question: Is there something different about the Internet-stock craze--a reason to believe that there won't soon be a permanent bust to follow what now seems like a perpetual boom?

"This time is different" is one of the most dangerous phrases in investing, because it's usually used to justify paying ridiculous prices for an asset.

That phrase was heard in the late 1970s in the oil patch, as energy prices and tiny energy stocks soared. It was heard again in 1991, when biotechnology stocks were headed for the moon.

Neither of those times was different. The stocks boomed, then busted, and the investing public's fascination with those sectors died.

But oil is a commodity. Biotechnology is a business with high barriers to entry and heavy government regulation.

The Internet, on the other hand, is vast, mostly unregulated and is growing exponentially in terms of users. And its potential is perhaps still not even imagined by the deepest thinkers in Silicon Valley.

"The Internet is a life-changing experience," says Byron Wien, veteran investment strategist at Morgan Stanley Dean Witter in New York. Not unlike the arrival of electricity or the telephone nearly a century ago, he suggests.

The question that has dogged the commercial Net from its birth a few years ago, however, is whether anyone will make money off it--or will make money for very long.

"It's easy to project a revenue stream" for a Net-related business, Wien notes. "It's much harder to project an earnings stream."

That has become the standing joke of Net investing, of course: The stocks are being valued based not on current earnings, of which there are none or very little, but on the expectation of spectacular success somewhere in the distant future.

"No one knows what these companies are really worth," concedes Andrea M. Williams, an analyst at brokerage Volpe Brown Whelan & Co. in San Francisco who has followed the Internet commerce business since the stock boom began a few years ago.

But what people do know, she points out, is that "the fundamentals of the business are getting stronger" every quarter, as more consumers worldwide get access to and begin navigating and doing business on the World Wide Web.

"Seventy-five percent of this country still isn't online," Williams says. For many investors interested in owning true growth companies, that's all they need to know: The Internet must be the greatest growth opportunity there is, they figure.

What's more, look who's driving Net stocks. It isn't institutional investors, although they are certainly there.

Rather, Internet stocks enjoy "a level of participation by individuals that is without precedent," argues Roger McNamee, a principal at investment firm Integral Capital Partners in Silicon Valley.

Many of those investors are Net-savvy and trade actively online, "and they have a different perception of risk than institutional investors," McNamee says. Traditional stock valuation is irrelevant to them.

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