Don't hold your breath for most Internet stocks to rebound, a
group of top stock analysts and investors said today at a panel discussion
that considered the outlook for the battered sector.
Last year was "the anomaly--a year where things got incredibly euphoric and
companies went public at earlier stages than ever before," said Henry
Blodget, one of the panelists and a well-known financial analyst at Merrill
Lynch. "(But) it's been an incredible value-creation period, even given the
The panel was jointly hosted by CNET News.com and the University of
Pennsylvania's Knowledge@Wharton. Jeremy Siegel, a professor of finance at
the Wharton School, moderated the panel, which included Blodget, venture
capitalist Ann Winblad of Hummer Winblad Ventures, and Banc of America
Securities' equity portfolio managing director Thomas McManus.
The group was asked to draw lessons from the whirlwind rise and fall of the
Internet sector, which has lost some 85 percent of its market value since
early 1999. The sell-off has hit companies across the board, leading some
start-ups to shut down for lack of capital and shaving billions in market
capitalization from relatively established players, including online
Opinions varied on the effects of the current market downturn, but all of
the panelists took a decidedly historic perspective about the market today.
Before 1995, a company going public in the software or online sector was an
average of 6.7 years old; the overachievers were a little more than 4 years
old, Winblad said. "Then we zoom forward to 1998 and 1999, and you've got
a bunch of 2-year-olds in the Kentucky Derby.
"Now the public market is not going to let 2-year-olds go public," she
added. "This means that companies (going public in the future) will be more
fully baked and...will know more about their predictive performances. We'll
have management teams that have worked together longer. They will have
customers...They'll own a place on the market maps, and they'll have some
numbers to determine the fundamentals of the company."
Until then, "the public investment market and institutional investors are
standing at the sidelines and waiting for things to sort themselves out,"
Winblad said. "And there's a lot more sorting out to be done."
McManus said that the recent dot-com shakeout has been the most severe. "The public market basically ballooned for
technology companies, and investors put a technology mantle on companies
that weren't really technology companies," he said. "They were just using
technology to sell books."
Michael Cohen, a financial analyst with Alpha Analytics, said the downturn
was the first of many in a "boom-bust cycle." The Internet phenomenon will
take decades to play out, he added.
The imbalance in Internet stock valuations had to eventually find
equilibrium, McManus said. In the future, investors will have to be more knowledgeable.
"We've underestimated the value of professional stock picking," McManus
said. "People need to go back to looking at mutual funds."
Most of the panelists agreed that most Internet stocks will not regain
their all-time-high valuations in the short or long run. But some Internet
companies are "ideally positioned" to regain their market values, Blodget
said, much as companies in the PC industry, including
Microsoft, Intel and Dell Computer, rebounded after a downturn in the '80s.
Blodget and Winblad said that several strong Internet companies have been
grouped with the bad and as a result have seen their valuations plummet with
the overall market. When investors see which companies are left standing
after the market downturn, these companies will emerge as the new leaders.
Some of the companies will not survive, but those companies that have
strong leadership and good products, such as Oracle and i2 Technologies, will
stand the pressure in the long term, Winblad said.
The sorting-out period for private companies "will all happen in the next
65 days," Winblad said. "No one wants to be doing this in January." As for
public companies, they are trying to get bad news out of the way now.
Mark Goldstein, chief executive at Kmart subsidiary BlueLight.com, said,
"The strong are going to be stronger, and the weak probably won't make it."
Winblad denounced the emergence of what she called "theme park" investing,
in which investors just look at the category into which a company falls rather
than researching the merits of the company itself or understanding the
"This is why Amazon is being challenged, because it is in one of the themed
graveyards," Winblad said, adding that investors gloss over important
facets of a company's viability. "I don't think anybody remembers the name
of the CEO at TheGlobe.com.
"We need to move away from theme-based investing--that's not the same as
sector-based investing. We need to understand why companies have a unique
value proposition (and ask): Should they belong on the market? Do they have a
definable competitive advantage? And (we need to) start looking 'al a
carte' at each, individual company."
How will the giants fare?
Cohen said that out of shares of Amazon, Yahoo and America Online, the
online retailer will perform the worst over the next 12 months. But its
future remains strong, he said.
Yahoo, which has been hit on the market because of reports of declining ad
revenues, seemed to be the favorite among the panelists. Internet
advertising is still so new, and in five years, Yahoo will garner a small
amount of its revenue from Internet advertising, Blodget said. Winblad
added that Yahoo "stands above the rest" with a strong management team and
a culture focused on profitability.
"We have to ask ourselves...what are the metrics of success for the
surviving dot-coms?" she asked. "How are the analysts going to measure the
metrics of success for an emerging dot-com leader?"
Some of the panelists said that a flurry of mergers will result from the
dot-com shakeout. "The most interesting mergers will be at the top of the
pile, not the bottom," Winblad said. "If something looks like a dead
company, smells like a dead company, and acts like a dead company, it's dead."
The panelists were asked to name the biggest factor weighing on investors
in the next several months. Cohen said that on the economic side, one of
the biggest risks to the market is the high cost of oil. As a result,
interest rates could go up and take the whole market down, he said.
Winblad mentioned a new Securities and Exchange Commission rule that will
require publicly traded companies to disclose company information to public
and institutional investors at the same time, as opposed to the previous
method of just advising institutional and private investors.
Blodget added that this could affect the way companies operate and
ultimately contribute to the market's volatility.
When asked what the next big thing would be, Winblad answered with
encouraging generalities for future technology advancements: "The edges of
the Internet are wobbly...It (may be) harder to get on the map, but there
are lots of opportunities to build new stuff that's needed today, let alone