RIYADH, 8 August 2005 — In the last ten years of the 20th century, Internet usage spread at an uncontrollable pace and reached every corner of our life. From a business viewpoint, there are many industries that support the existence of the Internet-supply related products and services. One industry provides the infrastructure, another is a service provider, and still another is a content provider. During the Internet boom, many companies tried to live off the Internet hype but only few survived, let alone being profitable. The list of the Internet companies that folded is very long and includes companies like Exodus Communication, WorldCom, and At Home whose combined market cap was around $100 billion. Some of the survivors are Yahoo, AOL, eBay, Amazon.com, and Google who continue to grow but at a more reasonable rate.
At the time of the boom, many investors considered that any company or an IPO with the word “Internet” or “.com” in its name or business plan, should be another Yahoo or eBay success story. Accordingly this thinking have changed the rules of investing and stirred-up the market for Net shares, with daily trading in and out of issues at a feverish rate. During the late nineties some 14.5 percent of the publicly traded shares in Yahoo for example were changing hands daily, compared with less than 1 percent for companies like Microsoft, General Electric or Merck.
Throughout this period many conservative investors bought Internet stocks, and those who did not, seriously considered doing so. They all felt sorry that they haven’t done so earlier. Only few wondered how safe it was to include such stocks in their retirement plan. There was a real fever in the stock market, yes it was the “Internet fever”.
The implementation and availability of the Internet had a big bang and it “caught fire” very quickly. People with venture capital funds and other business or private investors all wanted to join the “gold rush” of the Internet. Many dreamt exotic business plans that use the new facilities of the Internet. Although there were twenty or so real meaningful applications-opportunities, but the market offered over a hundred and it was difficult to choose the reality from the illusion. Specialized organizations marketed these business plans through IPOs and other means to private and institutional investors who did not need much convincing to join the bandwagon. In the final analysis a small number of these business plans — new companies survived. The others were folded and in the process razed the dreams and the savings of millions of investors.
The prevailing view at the time was that stocks of Internet companies can’t be valued using normal valuation methods. This view was supported by the fact that these companies were revolutionizing commerce, and who can predict what will happen in a revolution? What’s more they were in a new kind of business that defies the old rules of industrial capitalism, a business with a meager capital requirement in which everybody, winners, losers, or the future — can change in an eye blink. Why even try to create a five-year earning forecast for an Internet company? As more people made money investing in Internet companies, the above view attracted more followers.
The problem is that many people, analysts as well as investors, adopted the view that if you can’t say what the companies are worth, then they’re probably worth what they are selling for. The fact that they had a negative PE ratio or a PE over a hundred did not matter. At the time the overall conviction was that these companies are changing the world!! Who knows what they are worth? How much risk do they bring with them, or maybe there is more risk by not owning them!!
The above did not develop out of vacuum. There were many factors and players that contributed to the Internet Bubble. The main factor was the earlier boom in high technology stocks which prompted many parties to jump on the new bandwagon “boom”. These players included financial services companies, high-tech companies, stock analysts, entrepreneurs, investors, venture capitalists, investment banks, and telecom equipment manufacturers.
Over $5 trillion in stock market wealth has vanished from investors’ accounts due to the burst of the Internet bubble that started during the second half of 2000. Thousands of companies and millions of investors were wiped out in the process. As a result the stock market has become very scary. Those who survived and decided not to run away had to make a major adjustment to their investment understanding and strategy. A strategy based more on real performance and less on speculation and imaginary business plans.
(Salim J. Ghalayini, [email protected], is the author of “Stocks for Financial Security”. He manages several investment accounts.)