Dot-com investors face a conundrum: Even as the best-known business-to-consumer companies dwell in the depths, it is by no means clear that they deserve substantially higher valuations.
are all far off their highs.
Part of the price pressure is old-fashioned, tax-related selling by disappointed sellers taking loses to offset other investment gains. Part of the problem has to do with weaker-than-expected online ad sales. But longer term, there may be a more fundamental challenge for these stocks -- they may not deserve to trade at much of a premium to Old Economy competitors. It's even possible that the
you should hope for in these stocks is that they trade at
valuations to longer-standing competitors.
Why might that be? Because few dot-coms are likely to supplant more traditional competitors, as people had believed once upon a time. The 1998-'99 notion that several dozen companies were going to dominate 15 major industries within 10 years has been disproven. We are now finding that there will be fewer dot-com winners and that they will dominate smaller-than-expected sectors.
Dot-coms face enormous headwinds. They have enormous start-up costs. These money-losing ventures generally are competing for market share against established companies that have positive cash flow to finance their own Internet initiatives. Growth has been slower than expected. Market share has been hard to grab and hold. And profits remain elusive. It remains unclear how profitable any now-profitless dot-com will be even if it does succeed in establishing a place in the market. No one knows for sure which business models will work. The days of buying these stocks like lottery tickets are over. You cannot buy them arbitrarily. The failures may well go to zero.
Don't Worry ...
So just because a stock like priceline.com is off 95% from its high does not mean you should buy it or hold it. It may well be that priceline.com was so overpriced that, at best, it is worth only 5% of its prior valuation. After all, the business is little more than another way to obtain cheap airline tickets, car rentals and hotel rooms. What would you pay for a money-losing travel business whose supply of tickets depends on the airline companies that are potential competitors? Not more than you'd pay for a conventional travel company beginning to employ the Internet for its own ends. The premier travel business company in the world,
, trades at 2.7 times book value. So does priceline.com. Until priceline.com proves it has a better, bigger and faster path to profitability, it is hard to see the stock selling at a premium to American Express.
... It's an ...
What about eBay? It's a very nice classified-ads business but it still seems way too expensive even after plummeting 53% from the peak. The price-to-earnings ratio is 657 and it sports a none-too-brilliant return on equity of 2.7%. I'm sure eBay is a great way to sell all manner of objects, but newspapers and auctions are, too. As an investor, you might wonder if eBay at 657 times earnings is necessarily a better buy than, say,
at 15 times earnings.
I buy books from Amazon.com, but I don't know that I would buy the stock even though it's down 78% from the all-time high. Why not? It's a customer-friendly, money-losing book and record seller. Sales growth is slowing dramatically. And there is no reason to think Amazon will end up being that much more profitable than other good retailers. Heck, it isn't even close to being profitable at all, let alone more profitable than average.
... Internet stock!
Further, Amazon has issued a huge pile of debt to fund its very tangible, old-world investments in warehouse space and logistics. Even if it manages to reach profitability, how profitable will it really be with all that debt to service? I'd wait until Amazon got a bit closer to break-even before seriously considering the stock at current levels. Then check its valuation against those of other top retailers.
The more the Internet becomes part of society, the less we are going to value companies based on their "Internet" designation. In the past, when the telephone was the dominant information technology, we did not value companies based on the quality of their telecommunications infrastructure. In the future, we will not esteem Amazon, eBay and priceline.com more or less because they are dot-coms. They will be treated like any other stock. Recent price action in these stocks may simply mean that the future is now.
Brett Fromson writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to