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Internet Shares Slide as Earnings Disappoint

August 05, 2004|Chris Gaither | Times Staff Writer

Is the party over -- again?

Internet stocks took a big hit Wednesday, accelerating a six-week decline spurred by disappointing earnings, tepid forecasts and growing concern over the price of Google Inc.'s upcoming initial public offering.

The slump spread wide: Second-quarter profit shortfalls from online advertising and e-commerce sites such as InterActiveCorp and ValueClick Inc. dragged down Internet icons like EBay Inc., Yahoo Inc. and Inc.

The Dow Jones composite Internet index, comprising 40 companies, fell 3.2% on Wednesday, compared with a 0.2% decline for Nasdaq. The index has lost 11.5% this year, a sharper drop than Nasdaq's 7.4%.

Sliding share prices are making investors wonder whether Internet stocks are beginning the sort of free-fall that followed the boom of the 1990s, or simply correcting after a giddy run-up. The Internet index rose 74% in 2003.

Whatever the case, this downturn differs from the dot-com crash because most of the companies are making money -- just not as much recently as investors had anticipated.

"They were ahead of themselves on expectations for continued rapid growth," said Christopher Bonavico, a portfolio manager with San Francisco-based Transamerica Investment Management. "Too much money was chasing one sector."

This week's sell-off began Tuesday after Barry Diller's InterActiveCorp reported that second-quarter profit fell 24% and steered its forecast to the low end of expectations. The company, of which Diller controls the majority of voting rights, owns Web properties such as Expedia, and

InterActive cited tighter inventory -- hence fewer discounts -- on hotel rooms and airline seats, flagging travel in Europe and disappointing results at its Match dating service.

"While they present execution challenges, we think that these businesses can return to a growth path in relatively short order," Chief Financial Officer Dara Khosrowshahi said in a conference call.

Several analysts cut their ratings on the stock Wednesday, and it fell $4.23, or 15.7%, to $22.80. Competitor Inc. saw its stock fall 4.6%. But rival Orbitz Inc. swung to a profit Wednesday from a year-earlier loss and stuck to the lowered full-year forecast it issued last month. Shares rose 75 cents, or 4.5%, to $17.31.

Harder hit were small Internet advertisers. ValueClick's shares were hammered down $2.63, or 27%, to $7.16 a day after it missed Wall Street's second-quarter profit expectations and cut its third-quarter forecast.

Shares of rivals 24/7 Real Media Inc. and AQuantive Inc. fell 10% in regular trading on concerns that they would fall victim to the same market forces. But AQuantive showed resilience late Wednesday, reporting second-quarter profit that beat the Street's expectations. Its shares soared more than 18% after hours, and 24/7, which will report its earnings today, rose 3.6%.

Tumultuous trading in the Internet sector has eaten away at the stock prices of its leaders.

Yahoo on July 7 became the first of the big Internet companies to release strong earnings but disappointing full-year guidance. Since then Yahoo shares have fallen 14.4%, EBay shares have lost 12.7% and Amazon shares have dropped 27.2%.

"You can't see meteoric growth in all those names forever," said Andrew M. Schroepfer, president of Tier1 Research in Minneapolis, warning that blue-chip Internet companies need to take creative steps to keep revenue and profit on such sharp trajectories as they get older.

Some investors say a problem for the stocks is that they remain highly priced, relative to earnings, even after their recent declines. Yahoo's stock is priced at 84 times this year's estimated earnings per share; Amazon is priced at 37 times estimated earnings. By contrast, the average blue-chip stock has a price-to-earnings ratio of about 18.

Google, the Web search leader, may find the market turmoil damps its initial public offering, which could come as early as next week. Investors have expressed concerns that Google's expected offering price of $108 to $135 a share would be too pricey for average buyers.

If Google goes public and its shares fall sharply, Schroepfer said, other Internet stocks would tumble in sympathy.

Others, though, are still bullish. In a research note to his clients, Piper Jaffray analyst Safa Rashtchy predicted that InterActiveCorp's stock would rebound -- "because the fundamentals of the business are not broken and the stock is being punished as if they were."

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