Betting On Buzzwords

A reader wrote recently with a problem: She had invested in Terra Networks (TRRA)
when it went public on Nov. 18. The offer price for shares of the
Spanish Internet access provider was $13.41. The stock opened at 52-3/4,
our reader jumped in at 52-1/4, and shares dropped from there to close at
31-1/2. (TRRA since has climbed back to open Monday morning at 50.)

“All the hype surrounding this IPO made it all too tempting,” she wrote
one day after Terra’s IPO.

If our reader found TRRA hard to resist at nearly four times the offer
price, what madness gripped investors who bought shares of FreeMarket (FMKT)
and VA Linux Systems (LNUX)
in their ticker debuts late last week?

Hitting the street on Thursday, VA Linux Systems opened at a
jaw-dropping 299 — nearly 10 times the $30 per share price — before
closing at 239-1/4. This 698 percent first-day pop is the biggest of all time,
eclipsing the previous record 606 percent opener by the 13 months

The next day, business-to-business auction site FreeMarkets finished at
280, a 483 percent gain — the fourth-best ever — from its $48 per share offer
price. (The percentage would have been even higher had underwriters
Goldman Sachs and Morgan Stanley Dean Witter not jacked up the offer
price from the original $14 to $16 range.)

LNUX and FMKT are the only two stocks ever to close their first day of
trading on a U.S. exchange at a price above $200 per share. On
successive days, no less.

This isn’t irrational exuberance, it’s irrational irrationality.
Investors are betting on buzzwords, hoping to ride momentum the way
drunken casino gamblers keep laying down chips on a hot dice thrower.

VA Linux Systems isn’t really an Internet company — it sells network
computer servers and workstations for the Linux operating system —
though several of its customers, such as eToys (ETYS)
and Inktomi (INKT),
are major Internet players.

But the company has one of the hot buzzwords of the year — Linux — right
there in its name, and that was enough for some investors who thought
the stock could only go up from $299 a share. LNUX opened Monday at 200-1/8. (Hey, it’s going in the wrong direction!)

FreeMarket, meanwhile, is positioned in a sector that is broader than
Linux but as intensely popular among investors — B2B e-commerce. The
company runs real-time online auctions for buyers of industrial parts,
raw materials and commodities. It has $14 million in the four quarters
ended Sept. 30.

FreeMarket opened Monday at 271-7/16, down slightly from its
opening-day close on Friday. With a current market capitalization of $9
billion, FMKT is trading at 643x TTM revenue.

LNUX is a relative bargain. Based on Monday’s opening price, the company
has an $8 billion market cap and is trading at 266x TTM revenue ($30.1
million through October).

It’s not likely that either of these companies will grow into those
valuations anytime soon. Thus you can expect their stock prices to come
back to earth. Of course, this kind of rational conclusion may make no
sense in an irrational market.

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