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The Net IPO fever breaks
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August 10, 1999: 5:58 p.m. ET
A glut of new issues and a downturn in the sector have taken their toll on market
By Staff Writer John Frederick Moore
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NEW YORK (CNNfn) - The "dot-com" initial public offering just ain't what it used to be.
Take the case of HotJobs.com (HOTJ). The online job recruiting company initially priced its IPO of 4.75 million shares in the $12 to $14 range. By Monday, it had lowered the price target to $9 to $11 a share and cut the number of shares offered to 3 million.
HotJobs officially priced its IPO at $8 on Tuesday, then proceeded to finish the day at 7-5/8. Not exactly a stock that's moving in Internet time.
Along with a number of such lackluster performances, several planned IPOs have been pushed back indefinitely, including the much-anticipated Women.com offering.
A few months ago, an Internet-related IPO was considered a bust if the company didn't at least double its offering price on its first day of trading. Now companies are happy to gain any ground in its market debut. What's changed?
So many stocks, so little time
For one, there has been a glut of IPOs this year, particularly from the Internet sector. More than 100 Internet firms have gone public so far this year, and approximately another 100 are registered to begin trading by year's end.
Between May and July, a total of 161 companies -- Internet and non-Internet -- began trading for the first time, making this the busiest three-month period in history, according to Renaissance Capital, which tracks IPOs.
"There's so much supply it's become a chore for investors to say which is the best one to bet on," said Lawrence York, lead portfolio manager of WWW Internet Fund. "And when there's a downturn and things don't look good, people hold back."
It's also become clear that in the IPO market -- as in so many things in life -- it's quality, not size, that matters.
"While there are still good companies and quality deals out there, a lot of [IPOs] are pretty lousy deals that in any other market wouldn't have a chance to go public," said Dalton Chandler, Internet analyst at Needham & Co.
With that in mind, investors have become much more discerning when it comes to which IPOs they'll throw their money at.
"What we've seen over the last six months is a continuing trend toward higher-quality names across the Internet space," said Jonathan Cohen, Internet analyst at Wit Capital. "We think that's going to continue."
Everybody hurts
The current fallout, however, isn't limited to newly minted Internet firms. The sector as a whole has been in a trough over the past few weeks. Given the customary volatility of the sector, it's taken a while for anyone to realize Internet stocks have been in sell-off mode.
"This has been a little unusual in that Internet stocks have been selling off on a steady basis," Chandler said. "Usually, you see the sector down 20 percent one day then up 40 percent the next."
The catalyst for current prolonged slump: Investors have actually begun looking for profits from Internet firms.
Amazon.com Inc. 's (AMZN) revenue growth will continue to impress Wall Street, but investors are beginning to grow impatient with the river of red ink that is flowing through the e-commerce firm in ever-increasing volumes.
Investors also are expecting more from the profitable Internet firms, such as America Online Inc. (AOL) and Yahoo! Inc. (YHOO).
"I do think it's clear that people are starting to focus on earnings and when people are going to start showing earnings," Chandler said. "Although Yahoo! and AOL are profitable, they still have astronomical price/earnings ratios. It's going to be a while before earnings catch up to valuations."
For the first time, factors such as fears of rising interest rates are taking their toll on Internet stocks. Until recently, the sector continued to climb even as the broader market succumbed to such trivial factors economic indicators.
Nonetheless, analysts aren't ready to say investors have completely changed their attitudes about Internet stocks. Wall Street may never look at eBay (EBAY) the way it looks at General Motors (GM).
"Internet stocks are going to continue to enjoy a special position in the investment firmament because these companies are growing much faster than anything else," Cohen said.
But analysts also say when the sector does begin to recover -- most likely in the fall, in anticipation of the holiday shopping season -- it will be the smaller, lesser-known Internet players that will be left out in the cold.
In other words, telling investors that you have a "dot-com" at the end of your company name is no longer enough a smooth-enough pickup line.
"There are so many companies that are public now that I can't see everybody making it," Chandler said. "I don't think some of these new publicly traded companies are going to survive."
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