Wins yet worries for Internet stocks
NEW YORK — When shares of Yahoo Inc. soared 48% on the first day of this month, it felt like a flashback to the late 1990s when Internet stocks routinely defied gravity.
But this was far from dot-com euphoria. Rather, Yahoo was propelled by a takeover bid from Microsoft Corp. that reflected the Web icon's recent stumbles as much as its perceived opportunities, underscoring the peril as well as the promise of Net stocks these days.
The Internet sector has matured greatly in the years since the dot-com bust. Google Inc., EBay Inc. and Amazon.com Inc. have solidified their positions, while less likely survivors such as Priceline.com Inc. and EarthLink Inc. managed to escape ruin in the dot-com shakeout. And since the crash, enthusiasm over ever-rising Internet use has translated into generally sterling stock performance.
But those strong gains have renewed fears that Net stocks are overvalued. And despite some hopes to the contrary, analysts say, the sector is unlikely to be immune this year to the recession that many have predicted. Meanwhile, Yahoo's struggles show that the vast changes still roiling the Internet marketplace -- relegating the once-dominant company to second-tier status behind Google -- make it hard for investors to pick long-term winners.
Perhaps the biggest difference between the Net sector now and during the dot-com era is that today far more companies make money -- and far fewer exist on just a hope and a prayer.
"Now they're real companies," said Jeff Tyler, a portfolio manager at mutual fund group American Century. "You can apply real-life logic to them."
However, critics say the resurgence in the Net sector in recent years also left the valuations of many of its stocks overstretched.
After being pummeled starting in early 2000, an index of Internet stocks more than quadrupled from its low in October 2002 to its high five years later compared with a mere doubling of the more broad-based Standard & Poor's 500 index during the same period.
Despite a pullback in prices in the last four months, the Internet sector's average price/earnings ratio -- a measure of how expensive a stock is relative to its earnings per share -- is about 36. By comparison, the average price/earnings ratio of the companies in the S&P 500 is about 18.
