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Some pundits believe Netscapes net browser software is a dubious source of revenue. Said one in late 1995, "Theyve gotten 75% of the market by giving their product away. Id have hoped for 100%." But priced at a cheap 375 times eamings, wasnt it worth the shot? Internet service providers, such as America OnLine, Netcom, UUNet, and other similar sizzlers, dispense dial-up services, which, according to one analyst, are about as close as you can come to a commodity business.

So there you have it: little or no eamings and a big question mark. Many companies will never break even, and those marginally in the black need enormous capital expenditures to support expanding customer bases. All the same, the overwhelming crowd enthusiasm and enormous price mn-ups made investors believe the Intemet was the greatest discovery since electricity, or maybe even the wheel. The final sign of a market where social reality diverges widely from the underlying facts is the opinions of experts condoning the speculation.

A cover story in Business Week picks up the enthusiasm well:

The IPO market is fueling the innovations that are transforming the U.S. economy into the worids productivity powerhouse. The driving force behind tiie technological revolution changing tiie way we live and work is the maverick, the risk-taker-in other words, the entrepreneur. And backing the entrepreneur is the most sophisticated capital market in the world. Says Netscapes [Jim] Clark, "IPOs supply the fuel tiiat makes these dreams go. Without it, you die... ."

But are the prices paid for these state-of-the-art tech companies justifiable? For perspective, look back to 1969. Technology had just put men on the moon, while a new way of storing, retrieving, and accessing vast amounts of data was revolutionizing record-keeping. In the hot new-issue market of the period, no price was too high for Telex or Mem-orex, makers of computer tape drives and magnetic tapes. They also led the field in the new and advanced technology of disk drives. Nobody, certainly not stodgy IBM, could catch them. The market for disk drives and other storage devices seemed unlimited.*

The market bid up the price of Telex from $44 in August of 1969 to $142 the following Febmary, and Memorexs stock from $80 to $174 in the same period. It didnt work quite that way, however. IBM survived, and along with numerous others, competed effectively. Price of storage devices fell. Eventually, Memorex and Telex merged, later the combined company filed for Chapter 11. Investors lost everything. Now consider that the price rises of these companies in the go-go market of the late sixties, long considered the classic example of IPO speculation,



Some pundits believe Netscapes net browser software is a dubious source of revenue. Said one in late 1995, "Tiieyve gotten 75% of the market by giving their product away. Id have hoped for 100%." But priced at a cheap 375 dmes earnings, wasnt it worth the shot? Internet service providers, such as America OnLine, Netcom, UUNet, and other similar sizzlers, dispense dial-up services, which, according to one analyst, are about as close as you can come to a commodity business.

So there you have it: little or no eamings and a big question mark. Many companies will never break even, and those marginally in the black need enormous capital expenditures to support expanding customer bases. All the same, the overwhelming crowd enthusiasm and enormous price mn-ups made investors believe die Intemet was die greatest discovery since electricity, or maybe even the wheel. The final sign of a market where social reality diverges widely from the underlying facts is the opinions of experts condoning the speculation.

A cover story in Business Week picks up the enthusiasm well:

The IPO market is fueling the innovations that are transforming the U.S. economy into the worids productivity powerhouse. The driving force behind the technological revolution changing the way we live and work is die maverick, the risk-taker-in other words, die entie-preneur. And backing the entrepreneur is the most sophisticated capital market in the world. Says Netscapes [Jim] Clark, "IPOs supply the fuel that makes diese dreams go. Without it, you die. . . ."

But are die prices paid for these state-of-the-art tech companies justifiable? For perspective, look back to 1969. Technology had just put men on the moon, while a new way of storing, retrieving, and accessing vast amounts of data was revolutionizing record-keeping. In the hot new-issue market of the period, no price was too high for Telex or Memorex, makers of computer tape drives and magnetic tapes. They also led the field in the new and advanced technology of disk drives. Nobody, certainly not stodgy IBM, could catch them. The market for disk drives and other storage devices seemed unlimited.

The market bid up die price of Telex from $44 in August of 1969 to $142 the following Febmary, and Memorexs stock from $80 to $174 in the same period. It didnt work quite that way, however. IBM survived, and along with numerous others, competed effectively. Price of storage devices fell. Eventually, Memorex and Telex merged, later the combined company filed for Chapter 11. Investors lost everything. Now consider that the price rises of these companies in the go-go market of the late sixties, long considered the classic example of IPO speculation.



Devastating Changes in Perception

Many of us beheve a collapse is inevitable. The only question is when. However, even without an IPO crash, the leading new issues have dropped significantly as investors reassess their inifially optimistic outlook. Professor Ritter, in mid-March of 1997, measured the performance of the 21 hottest new IPOs for the previous four years. The hst included Boston Chicken, Yahoo, Netscape, Shiva, and Tivoli Systems. To make this elite group, the stocks had to mn up at least 100% from their initial offering price by the end of the first day of trading (the point at which most investors could initially buy the stocks). How did the princes of the IPO market do from here on? Poorly. This elite group fell 60% from their highs by late December 1997.

Table 16-1 also shows how fast investor perceptions can change; some of the red-hot Intemet concepts were down 50-90% or more from their highs by the end of 1997. Why were so many Intemet stocks abandoned in the midst of a heated bull market? "Investors have become more realistic about how long it will take for many of the Intemet companies to show any profit," according to Richard Shaffer, a principal of Technologic Partners, a New York-based technology research firm.*

The money managers and investors who bought those issues either forgot or did not know what had happened in past bubbles. This time was surely different.

Not Very Different

Psychology and the Stock Market, Contrarian Investment Strategy, and The New Contrarian Investment Strategy all discussed the characteristics of manias. What 8 8 8 me is how quickly the hst has grown. Since 1977, when Psychology and the Stock Market was published, three new IPO bubbles have floated by.* This almost doubles the number of domestic bubbles in this century. The new manias have taken

* The IPO manias of 1976 to 1983 and 1989 to 1997, the gambling stock mania of 1979 to 1983, and in addition, the worldwide real estate craze of the second half of the eighties.

are a fraction of the gains of the Intemet stocks and other IPO winners in the present bubble.



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