where it was priced at a mere 375 times eamings. UUNet, an Intemet access provider, went public in May 1995 at $14 and closed the first day at $26. Spyglass was issued at $17 on June 27,1995, and almost reached $100.

Then there was Yahoo, 1996s hottest new Intemet stock. It went pubUc on April 12 at $13 and opened at $24!4, mnning rapidly up to $43, a gain of 231%. Tumover topped 17 million shares, or more than 6 times the 2.6 million shares originally issued. The company, which was founded by a pair of Stanford University students, sported a market value of over a billion dollars the day it was sold to the pubUc. The stock traded at 77 times optimistic forecasts of 1997 revenues. All diis on the dream of connecting every American home and-judging from its price-a few extraterrestrials. Its bad taste to even ask about eamings-the company operated at a loss.

IPOs in many other sectors did just as well. Amati Communications, a data-networlcing company, saw its price rocket 1,651% on lightninglike eamings growth in the 12 months to June 1996. L.L. Knickerbocker, a pint-sized company in home shopping, appreciated 14-fold. Diana Co oration, another recent IPO operating in the "related areas"-at least to hungry buyers-of food and telecommunications, increased 12 times over the same period. Accustaff, a temporary help provider, shot up ninefold over the same 12 mondis, to a market value of almost $2 billion.

In all, by late June 1996, 682 concept stocks had doubled over the previous 12 months, according to Baseline Data Service, with the overall market up less than 28%. Thirty-five had gained 500% or more, while 114 had quadmpled. The hockey-stick charts were alarming to a number of veteran market observers, who said that even in the go-go years of the 1960s and 1980s, there was never such widespread speculative froth for small- to medium-sized growth companies.

Michael DiCarlo, who managed the hot John Hancock Special Equities Fund (up 72% in the 12 mondis ending May 31, 1995), was a pro who wasnt worried. He maintained that even a stock that has tripled or quadmpled isnt necessarily overvalued. "If you buy growth at a discount, then a stock can triple in value and it still makes sense to own it," he contended. Mr. DiCarlo, like diousands of others, was betting his clients money, if not his career, that he could accurately project eamings years into the future. As was demonstrated in chapter 5, the odds are against him.

However, the odds definitely favored the sellers of the hot IPOs, resulting in some minor modifications in their life styles. At 5:59 a.m., on August 2, 1995, according to USA Today, Reed Hastings had $8,000 in

16-1 Star Wars IV

Rational Behavior Strikes Back in the IPO Market

Source: Prepared from FactSet data.

his bank account and Uved in an unheated cottage near San Francisco. • At 6:01 A.M., as founder of Pure Software, he was a multimillionaire. Hundreds ofhis employees have made fortunes or near fortunes in stock options. Secretaries and other lower- and middle-level employees were given stock options worth years of salary.

And the underwriters we met previously, with their not exactly earth-shaking records, were back with bells on. Three of the four horsemen, Hambrecht and Quist, Alex Brown & Sons, and Robertson Stephens, had banner years in 1996. Scores of other investment houses made big bucks selling IPO dreams to enthusiastic buyers.

As Table 16-1 shows, many Intemet stocks more than doubled in a few months. What were the facts behind the craze? The theme that dominated an Intemet investment conference in mid-1996 was that, popular as it is, nobody knows its ultimate promise, nor, therefore, the prospects for Intemet stocks. The potential of the Intemet for electronic commerce-ultimately its greatest value-is a gigantic imponderable. Too, none of the companies noted above has a shot at becoming a financial blockbuster unless Intemet access becomes much easier, and unless many more people, including the less affluent, embrace it.

In the words of Donna Hoffman, business professor at Vanderbilt University, who is exploring business opportunities on the Intemet, "Significant barriers to commercialization, especially on the World Wide Web, preclude the predictable and smooth development of commercial opportunities on this hot new medium."

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 earnings, wasnt it worth the shot? Intemet 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: littie 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 die opinions of experts condoning die speculation.

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

The IPO market is fueling die innovations that are ti-ansforming the U.S. economy into the worlds productivity powerhouse. The driving force behind the technological revolution changing the 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 worid. Says Netscapes [Jim] Claik, "IPOs supply the fuel that makes diese 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.