Fueling the madness
Stovall raises big questions about Internet stocks: Who’s buying them at
these prices, and why?
There’s a theory going around Wall Street that small investors are
driving up prices of Internet stocks.
Traders read their logs and report that the majority of transactions involve fewer than 1,000 shares at a time, typical of individual investors. Institutions usually trade in much larger blocks. On Monday, for instance, there were 13.7 million shares of Yahoo traded worth $2.6 billion. Only 522,277 of those shares were traded in blocks of more than 10,000, Nasdaq says. The majority were divided among 27,485 smaller transactions, about 500 per trade.
But Al Goldman, the technical analyst at A.G. Edwards, says it’s
virtually impossible for mom-and-pop investors to have traded billions
of dollars in combined Internet companies. “Your individual investor
doesn’t put up $85,000,” he says.
So it must be the pros doing the buying, and many are investing just
because the stocks are going up, not necessarily because they believe in
the business. To them, the stock prices are so out of whack with
underlying finances, the relationship is meaningless. At $191 a share,
Yahoo–which announces quarterly earnings today–has a market
value of about $8.8 billion, which is 428 times its estimated earnings for
1998. Yahoo says it’s a media company. A typical media company
such as Viacom trades at around 26 times estimated earnings. If Yahoo
were valued the same way, it would be worth $537 million–less than
$12 a share.
So to the pros, an Internet stock is hot only because it’s hot. Which
leaves the rest of us still looking for that toehold on reality.
Why the Internet?
Here are some numbers that make reality a little more solid. The
Internet has about 100 million users, up from 30 million in December
1996. The pace of growth is not slowing. Yahoo gets about 32 million
visitors a month and rising. Excite, Lycos, Infoseek and other similar
portal companies aren’t far behind. America Online has more paid
subscribers than the 11 biggest newspapers combined. About 20
million adults say the Net is “indispensable,” according to Find/SVP. At
least 20% of the population turns to the Net for news, vs. 6% two
Clearly, something big is happening. But the companies need to turn all
that attention into revenue. For companies such as Yahoo and AOL,
the main way to do that is through ads. So far, though, advertising on
the Net has been a dud.
Estimates for Internet ad spending this year range from $300 million to
$1 billion, depending on who’s doing the measuring. That’s but a drop
in the ad bucket. Total ad spending in the USA last year for TV, radio,
magazines, newspapers and outdoor was $73.2 billion, Competitive
Media Reporting says. And the big consumer advertisers are moving to
the Net slowly.
“It’s going to remain a small percentage of our advertising budget for
some time to come.” says Coca-Cola’s Kari Bjorhus, who adds results
are too tough to measure.
Yet this year might be a watershed. The Association of National
Advertisers just surveyed members on Internet advertising. Of the 112
companies who responded, 68% said they advertise on sites besides
their own, compared with 32% a year ago. For those who didn’t use
the Internet for advertising, 18% said they would within the next 12
months. Another 27% said they eventually will.
Those numbers would certainly crank higher if Procter & Gamble
throws its weight behind Net advertising. P&G spends about $3 billion
on ads a year. It spent $3 million on the Net the second quarter of
1998–a “dramatic increase” over what it spent during the same period
last year, says Denis Beausejour, vice president of worldwide
advertising at P&G. “We consider all this to be an important signal that
P&G is serious about interactive marketing.”
While P&G shares Coke’s concerns about the Net, Beausejour says,
“We have a vested interest in making the Web the most effective
marketing medium in history.”
If that happens, Net content companies will reap a windfall.