SAN FRANCISCO -- One of the more notorious specters of Internet stock phenomenon has been the Fraud-U-Net press release. This phrase has gained currency on chat boards after
cited the trend on a
The phenomenon is well-known: A bricks-and-mortar business puts out a press release saying, "We're goin' on the Net," and the stock goes through the roof. (Typically demure, Cramer now says he was "inartful" in the use of the term as it relates to any particular company.)
But a funny thing happened on the way to the stock rally -- these releases stopped working. Not just for businesses whose e-strategy originated in the PR department. For the real contenders too.
There was no better proof than with
e-commerce announcement on June 17. Presenting at the
Hambrecht & Quist Branded Consumer Conference
in Napa Valley, Williams-Sonoma Executive Vice President Pat Connelly laid out detailed plans for an extensive, carefully conceived online
stores, as well as
wswedding.com, a wedding registry site quietly launched on June 1. (This comes in addition to a
rumored venture by the company into lower-end housewares a la
and its cheaper sister,
The scene was set for a major stock run: a captive audience of a few dozen big-money fund managers, H&Q analyst Bonnie Kramer Tonneson on hand to predict noticeable e-commerce revenues for Williams-Sonoma by the fourth quarter and a market ripe for rumor. But shares of Williams-Sonoma hardly reacted, rising just 1 7/16 to 30 1/4.
Compare that with the reaction from
shares last November. When CEO Richard Thalheimer said Thanksgiving weekend sales on the Web were up 500%, the stock rose more than 320% in a week to 21 3/16. Never mind that he wouldn't say what Web sales were before Thanksgiving.
Williams-Sonoma's plan was comprehensive, smart and, to many in the audience, thoroughly convincing. "We have 19 million names of customers on our database," said Connelly. "They are predominantly upscale, well-traveled, well-read women, and 75% of them are on the Internet. "Compare that with other Internet companies that have to spend enormous amounts on customer acquisition," he says. "We have a low cost of customer acquisition. We have 50 million store visitors a year, 500 million catalogs mailed each year -- believe me, people will know about our Web site."
He also wove a compelling tale on the established distribution power of Williams-Sonoma. "We've been doing this for 20 years: We know how to ship," says Connelly. "We will be able to support a $1 billion dollar direct-to-consumer operation. Right now, we can deliver packages to anywhere in the U.S. within three days without ever using an airplane." While veteran investors were blown away by this presentation, the market yawned.
The reserved response points to some important changes in the market for Internet stocks. First off, there are so many Internet stocks trading near their annual lows, why hunt for a bargain when established players are cheaper than they've been in months?
"If I'm looking for an Internet investment right now, I'm buying
," says one New York-based fund manager. "I know these guys are gonna see Internet revenues -- who needs the risk from a bricks-and-mortar company that might screw it up?"
Secondly, the universe of Internet stocks is significantly higher than it was last fall. More than 70 Internet companies have gone public in 1999 alone, offering investors choices beyond companies with a press release and a promise. Says the fund manager, "I don't need a 'makeitupaswegoalong.com' to invest in the Net right now," he says. "The odds are
just did an IPO like that, and there's plenty of garbage out there."
Another reason Wall Street is staying away is that the shadow of Fraud-U-Net releases has proven to be a long one. It's a once-bitten-twice-shy scenario. Shares in Sharper Image are back below 9.
have also done a boomerang job on investors.
"We got spoiled because the appreciation was so spectacular," says Mark Rice, a Chicago-based hedge fund manager. "But I think people will be wary to go down that road again."
It's significant that the run-ups primarily affected smaller-cap issues -- a wave of Internet inspired affection does not make the large-cap swoon (as
noted in an excellent piece last winter). Still, professional money managers wistfully cite the notion that some order is beginning to affect Net stocks. "Doing fundamental blocking and tackling hasn't hurt you, but it hasn't helped you much with these Internet stocks," says Carter Dunlap, who once crunched numbers for
and now runs
Dunlap Equity Management
in San Francisco. "But I think that's changing and investors are starting to apply some fundamental analysts to Internet stories."
Tonneson concurs. "'Dot-com' isn't enough to lure investors anymore," she says. "I think the market is jaded. People want to see real business plans and proof that companies can execute."
And even with Williams-Sonoma, that doesn't happen until the online customers are buying.