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Mania Makes the World Go 'Round, as Internet Shows

November 15, 1998|TOM PETRUNO

Most Americans, it's safe to say, did not purchase shares of Inc. on Friday, when the provider of free World Wide Web pages began trading for the first time.

But somebody--at least one investor, somewhere--paid $97 a share early Friday for the New York-based company, which had sales of just $2.7 million in the first nine months of this year and losses of $11.5 million.

By the end of trading, had made history. The shares ended the day at $63.50 apiece on Nasdaq, a 606% gain from the stock's initial offering price of $9 on Thursday. That made it the biggest first-day gainer ever among U.S. initial public stock offerings.

Of course, the buyer who paid $97 for the new stock probably finds cold comfort in's entry in the record books: That person has a 35% loss so far--if he or she didn't sell before the closing bell Friday.

Well before last week, the word "Internet" was rarely spoken on Wall Street without the word "mania" immediately following it. is just more of the same, albeit with bigger numbers: A money-losing young company whose livelihood is tied to the Internet sees its stock soar amid frenzied buying that has no apparent basis in the firm's near-term business prospects.

Two days before went public, an Internet consulting company called EarthWeb Inc. made its stock debut, selling 2.1 million shares to investors at $14 apiece. That stock ended its first day of trading at $48.69, for a 248% gain. By Friday's close, the price was $67.

And in between the EarthWeb offering and's stock sale on Friday, a small, money-losing (you sense a pattern here?) Santa Barbara-based telecommunications company called AvTel Communications Inc. on Thursday announced plans to introduce high-speed Internet access in that city and several surrounding communities.

Although AvTel's technology is not at all proprietary--the company is just another Internet service provider, really--its announcement drove its stock up from $2.25 to $31 on Thursday (yes, that's a 1,278% gain), at which point the Nasdaq market's regulators suspended trading while asking for "additional information."

The numbers are becoming so large in this latest Internet stock trading craze that it's hard to imagine that the money changing hands is real. It feels more like a big Monopoly game, complete with multicolored play currency.

But the money is real. And much of it appears to be put up by individual investors, not by major institutional players.

Indeed, Wall Street traders say the Internet stocks are now a favorite playground for individuals who do their investment research on the Net, actively discuss these stocks in Net "chat" rooms and trade furiously via online brokerages at super-low commission rates.

And why not? One of the cardinal rules of investing from Peter Lynch, the Fidelity Investments legend, is to invest in what you know. Millions of Net-savvy individual investors can argue that what they know is the Internet--and that the Net is still in its infancy.

No one can quantify the Internet's ultimate commercial potential, but it must be vast, most reasonable people would agree. Thousands of new users get online daily, worldwide. Tens of millions will get online in the years to come. So how could growth-oriented investors ignore these stocks?

Of course they shouldn't be ignored. But how many buyers of AvTel Communications on Thursday did legitimate research into the company--as opposed to simply rushing in on what sounded like stock-moving news, in the hope of making a fast buck?

Similarly, we could probably count the "long-term investors" in on one hand, given that more than 15.6 million shares traded Friday. That's more than five times the 3.1 million shares that were issued to the lucky investors who got a piece of the deal at the offering price of $9 a share.

So in effect, each issued share changed hands five times in one day. (In reality that isn't true, because some shares might have turned over 10 times and others not at all. But you get the point: A lot of people got into, and out of, in a matter of minutes or hours on Friday.)

All of this activity, and the huge price swings of Internet stocks as this mania has ebbed and flowed in recent years, have made for both big winners and big losers among individual investors.

We could fill pages with commentary from Wall Street veterans who believe that the action in Internet stocks is insane. People shouldn't be paying such prices for the stocks of these companies, most of which haven't yet earned a dime--and might never--plenty of veteran investors will tell you.

And they're probably right. But then, a lot of people shouldn't be going to Las Vegas, yet they do.

Like Vegas, the Internet stock mania is a game with legal tender. And like every mania before it, this one will most likely end badly for a lot of the players--which is pretty Vegas-like as well.

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