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Internet bubble deflating
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September 5, 2000: 4:26 p.m. ET
Web stocks are still overvalued, Internet Bubble author says
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SAN FRANCISCO (www.redherring.com) - Steve Jurvetson, the always happy-go-lucky VC from Draper Fisher Jurvetson, is a classic example of the new generation of the Valley's financial cowboys, who got into the business after 1992 and thought cranking out a couple hundred IPOs a year was business as usual.
Drunk on the Internet Kool-Aid, Mr. Jurvetson used to hassle my brother Michael and me relentlessly about the thesis of the our book The Internet Bubble, which contends that all the whoop-tee-do stocks he was in love with were overpriced. So, shortly after the first major deflation in the Internet stock balloon in April, I saw him at a business affair and chided him, "So, Jurvie, what's your net worth looking like these days?" Still half beaming, he shot back, "Oh, down 50 percent."
The Red Herring, of course, can pretty much take full credit for Mr. Jurvetson's rise to stardom (geekdom?). We sincerely doubt, for instance, that his boyish grin would ever have blazed across the airways, nor would he be featured on the covers of men's magazines as the poster child of Silicon Valley success, if we hadn't identified him as the "John Doerr of the next millennium" back in 1995. And in spite of our friendly kidding, we still hold that opinion.
The glory days will be over the moment Silicon Valley loses its optimistic spirit, so it's nice that there are smart guys like Jurvie around with fires raging in their bellies.
When we wrote about the bubble, we did a little math to support our case. Now that it is just over a year after we first crunched the numbers, we have returned to our calculators to see how well our predictions played out. Read on to learn where we have been right so far, and why we think there is still a portfolio of bubble stocks floating around.
Hold on, it's not over yet
Now that the market for Internet stocks is sorting the wheat from the chaff, a reexamination of the Internet bubble is long overdue.
As some of you know, I co-wrote a book called The Internet Bubble with my brother Michael, predicting the shakeout of Internet companies that were overfunded and overvalued. Almost a year has passed since the book hit the streets last November, so the Red Eye, with the help of our loyal buddy Cameron Hyzer of Broadview International, rebooted our Excel spreadsheet to see how our thesis is shaping up.
At the peak of the market for Internet stocks in January of this year, the 400-plus public Internet companies were worth a steep $1.5 trillion combined. As of a new calculation done in mid-July, they are now worth about $970 billion, a decline of more than 30 percent. At their low at the end of last May, the combined market cap of the portfolio was as low as $750 billion. During this lull, when the Nasdaq bottomed out near 3,000, the market had Steve Jurvetson in a headlock.
Even with this shakeout meltdown, the Red Eye spotted a portfolio of companies that is still overvalued. Specifically, according to our calculations, 74 of the 400 companies had implied growth rates of more than 100 percent, and 11 of these were over 200 percent. These data support our claim that there is still plenty of overvaluation left in the market. The list of the plump 11 and their sectors is below, along with each company's corresponding percentage of inflation.
- Ibeam Broadcasting (retail content), 376 percent
- Akamai (enabling telecom services), 274 percent
- Tivo (enabling software), 273 percent
- Sonus Networks (enabling software), 264 percent
- Bookham Technology (enabling telecom services), 261 percent
- Gigamedia (enabling telecom services), 245 percent
- Internet Capital Group (enabling services), 240 percent
- Telocity (retail e-commerce), 237 percent
- Avanex Corporation (enabling telecom services), 207 percent
- Intertrust Technologies (enabling software), 205 percent
- Aether Systems (enabling software), 200 percent
The three sectors that have clearly taken a good licking have been retail e-commerce, content companies, and telecommunications-enabling companies. Two of the sectors we analyzed were exceptions to the rule; stocks for enabling services and enabling software actually saw an increase in returns for the year-long period. Many investors' hopes were dashed as the market plunged in March and April of this year. On the whole, that was the most dramatic time for Internet stocks.
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But as 3Com founder and Ethernet-inventor-turned-industry-pundit Bob Metcalfe wrote recently, the bubble still has some air in it. "No single bubble-bursting day stood out," he wrote. Unlike the sudden collapse of the price infrastructure for tulips during Europe's tulip craze back in 1550-1637, the market for Internet stocks is repeatedly correcting itself.
Mr. Metcalfe is careful to say that there is still quite a bit of innovating to be done. We agree with him. So, as entrepreneurs and innovators continue to push the envelope of technology, new bubbles will emerge as they do in any revolutionary period. Then, once again, the market will shake out the excesses created by a period of over-funding and over-zealousness.
Next week we will be back with yet a closer look inside the Internet bubble.
Discuss today's column in the Red Eye column discussion, or check out forums, video, and events at the home page.
Please send your comments to Vinnee Tong, a regular contributor to the Red Eye. 
© 1997-2000 Red Herring Communications. All Rights Reserved
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