SAN FRANCISCO -- That giant sucking sound you hear is the mighty Internet sector pulling wads of dollars from the pockets of starry-eyed bulls.
Nasdaq Composite Index
fell 138 points Monday, losing 5.5% of its value and leaving a red trail on many trading screens. The Nasdaq has dropped 10% in the past five trading days, and the
TSC Internet Sector
index has fallen 30% after a 16% drop on Monday. Some of the biggest losers were
, both down 25%;
, down 30%; and
, down 28%.
Analysts and fund managers blame the continuing shift of money into larger-cap cyclical stocks, international stocks and even bonds. Others point anonymous fingers at Mary Meeker, the highly influential
Morgan Stanley Dean Witter
analyst profiled in this week's issue of
The New Yorker
. In the article, Meeker forecasts a correction for these stocks sometime this year, a prediction some are calling self-fulfilling.
You Could've Heard the Dot Drop
All agree that, because Internet stocks have shown off their ability to advance 30% or 40% a day, they have just as much mobility on the downside. Most still scratch their heads as to the real reason behind the sudden reversal of Internet stocks. When asked about Tuesday's outlook, analysts were split between more losses or a sharp rebound.
"When these stocks start running, people can lose confidence in these models," says Scott Appleby, an analyst at
a buy. (ABN has no underwriting relationship with any of these companies.) "No one wants to be in a stock that just fell 50 points."
Perhaps, but some argue that the selloff presents an opportunity to get into stocks that have been considered too expensive. And some positive news Tuesday morning before the markets open could also help the technology stocks reverse some of their losses.
If the company disappoints or if investors refuse to be swayed by strong results from the online broker, the ramifications from another one-day plunge could hurt IPO hopefuls such as
. Some Internet deals could be shelved, says Dalton Chandler, an analyst at
Needam & Co.
who has a hold rating on
. That could put a plug in the steady flow of Net offerings.
Despite the momentary panic, nothing has really changed fundamentally for Internet stocks. Traffic and number of registered users at sites are increasing, and revenue is growing -- at least for most companies. There are a few awkward exceptions.
revenue declined slightly from the fourth quarter to the first quarter, and
revenue remained flat over the same period.
In this tumultuous market, "good news is bad, and bad news is horrible news," says Nick Moore, a fund manager with
Jurika & Voyles
who holds no position in any Internet stocks. Moore says many stocks have been retreating since Yahoo! kicked off earnings season April 7. "Leaders have so far done pretty well."
But even the stocks of companies with good numbers haven't reacted very positively. One concern is that traffic is growing faster than revenue, suggesting a rise in the number of visitors isn't necessarily translating into more dollars. Yahoo!, for example, saw revenue from the fourth quarter to the first quarter grow 13% to $86.1 million, while traffic grew 41% over that period.
Another factor weighing down tech stocks may be a recent report from Arnie Berman,
Soundview Technology Group's
chief strategist. Berman says that the Y2K problem could force a large number of companies to significantly reduce their tech budgets in the second half of 1999. "It could very well turn the tech sector on its head in the second half of the year," says Berman.
Berman points out that very few executives have admitted that there will be a slowdown in spending. "The only exceptions I have seen so far are warnings from
-- but I expect to see a lot more come July."
All of these concerns could be brushed aside if prices rebound. While many, such as Jurika's Moore, still consider Internet stocks overvalued, Net stocks have been driven by a logic all their own -- a logic that follows emotion more than fundamentals.
But for now, the emotion is on the side of those who are bearish on Internet stocks. "If you didn't think
the market could do this, you shouldn't be there," Moore says.
Senior news writer Eric Moskowitz contributed to this report.