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Rekindling the Passion for Internet Stocks

I had a "What the heck?" moment the other day when I was watching TV and someone said we've been in a bull market for three years so it's time to take a break and maybe see a bear market for awhile.

Umm, the market is flat since December 1998.

That's right. Almost seven years ago, the S&P 500 closed at 1195, right where it closed on Wednesday. Ever since then, we've been watching CNBC on our treadmills, moving nowhere.

This fact implies that everything we were hoping for back in December 1998 has failed to come to pass. Back then, everyone figured the rise in the Internet would increase productivity, create new companies, move retail online, and so on. So what happened? Well, the Internet has more than delivered on its promise, and that is why I am bullish on the sector here.

On Dec. 21, 1998, the day the S&P first cruised past 1200, Aaron Task wrote an article titled "Passion to Own Stocks Burns Brightly On." The passion didn't last, but perhaps it should have. Because all of the hopes and dreams back then were related to the Internet, let's take a look at where the Internet was and where it is now:

In 1998, there were 147 million Internet users, and there are now 957 million users, a modest 600% increase in about seven years. (So it is short of 100% annual growth.)

Interestingly, this far exceeds what people were predicting. Conveniently for the purpose of this article, market research firm Ovum wrote a report titled, "Internet Market Forecasts: Global Internet Growth 1998-2005" in December 1998 that predicted the number of people worldwide would quadruple by 2005. In fact, it's gone up by more than a factor of six.

How about online retail sales? started keeping statistics in the second quarter of 2000 and through the second quarter of 2005, online sales rose to $21 billion from $5 billion, jumping to 3% of total retail sales from 0.63%.

Finally, look at the table below. Excluding, the top 10 sites in October 1998 lost $24 million, according to Media Metrix. However, the top 10 sites today, again excluding, generated operating income of $1.82 billion, according to Alexa.

That's fairly acceptable growth rate over the past seven years. Now if only the market would uptick for once.

Taking Off
The Net gets its earnings machine in gear.
Top sites in October 1998 Operating Income Q4 1998 Top sites October 2005 Operating Income Q2 2005 $121mm $216mm $18mm $118mm ($10mm) $342mm (Not broken out, assuming 0) N/A ($147mm) $291mm $2.6mm $3.7bb $2bb $52mm N/A N/A ($9mm) N/A N/A $261mm
* Total Earnings ($24mm) * Total Earnings $1.28bb
* Total Earnings for 1998 and 2005 exclude
1998 Figures: Media Metrix
2005 Figures: Alexa
Research: Formula Capital

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of Trade Like a Hedge Fund and Trade Like Warren Buffett. At the time of publication, neither Altucher nor his fund had a position in any of the securities mentioned in this column, although positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback; click here to send him an email.

Interested in more writings from James Altucher? Check out his newsletter, Internet Review. For more information, click here. has a revenue-sharing relationship with under which it receives a portion of the revenue from Amazon purchases by customers directed there from

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