The Internet traffic light turned from red to a flashing green in 1998, as investors revved up for what will surely be remembered as a record-breaking year for web retailers.
"I think it was an absolutely blowout Christmas for Internet retailers," said Abhishek Gami, who tracks the sector for Chicago-based William Blair & Co. "They are much more sophisticated, and the quality of this season's products is much better than last year's."
Investors' expectations clearly underscored his remarks. The ISDEX index of 50 Internet stocks closed December 8 at $235 5/16, up 142 percent over the last 12 months, and up roughly 44 percent since the beginning of November, according to Mecklermedia (Nasdaq:MECK), administrator of the index.
By the close of this year's holiday shopping season Thanksgiving to Christmas cybervaults are expected to have chimed in an estimated $5 billion in sales, according to a forecast by San Francisco-based BancBoston Robertson Stephens analyst Keith Benjamin.
Battle Lines
With such high stakes, retailers across the web are frantically scrambling to tweak their business models in an effort to attract more consumer dollars. The stock of Amazon.com (Nasdaq:AMZN), for example, climbed to a record-high of $233 1/8 a share in mid-December on word that the book and music-retailing giant had added video and holiday gifts to its arsenal of products. Also unwilling to forgo their invitations to the party, search-engine providers Yahoo! (Nasdaq:YHOO) and Excite (Nasdaq:XCIT) threw kerosene into the fire by announcing retail strategies of their own.
However, it's not just the industry's leaders who have upped the ante. Virtually all of the second and third-tier retailers also joined the fray through advertising campaigns, strategic alliances and stand-alone product offerings. Here is a sampling:
* Computer retailer Cyberian Outpost (Nasdaq:COOL) rolled out a national print and television advertising campaign ahead of the holidays that suggested consumers should "stay home and shop for computers." The Kent, Conn.-based company announced in November that it was joining forces with CDnow (Nasdaq:CDNW) and other retailers to form a shopping network.
* Internet mall retailer CyberShop (Nasdaq:CYSP) said in November that it was going to expand its offerings through more focused, category-killer boutiques. In moves that significantly increased marketing expenses, the New York-based company recently launched electronics.net, a joint venture with Tops Appliance City (Nasdaq:TOPS) and egift.com, a gift-oriented site that enables shoppers to place orders as late as 9 p.m. EST for next-day delivery.
* Within the course of one week, Digital River (Nasdaq:DRIV) inked distribution agreements with U.S. West (NYSE:USW) and Anything Internet to distribute its 131,000 software titles over the Internet. Privately-
held Anything Internet operator of www.anythingpc.com, www.anythingmac.com and www.anythingunix.com is currently readying itself to make a run at the public market, according to Scott Sitra, who sits on the company's board of directors.
Chasing Tulips?
Despite the good cheer over the holiday shopping season, many analysts have questioned whether individual stock valuations may once again be moving ahead of themselves. As recently as June, the sector climbed 35.7 percent only to retrench almost 40 percent over the following two months.
"We expect a big quarter, but we're scared by the indiscriminate buying of the e-tail dogs, like K-Tel (Nasdaq:KTEL), N2K (Nasdaq:NTKI) and CDnow," Benjamin said. "We would be a little cautious here. It wouldn't surprise me to see a 20-percent to 30-percent correction [in the ISDEX index]."
Analysts are advising investors to retain some exposure within the industry, but only in large names that are the most likely to take the lion's share of retail sales.
At the same time, analysts have expressed concerns about the pure speculation involving
some of the sector's
newest entrants. Some recent examples were
the dramatic first-day performances of EarthWeb (Nasdaq:EWBX) and theglobe.com (Nasdaq:TGLO).
EarthWeb, which provides resources for computer programmers, initially climbed to as high as $85 1/16 in its inaugural session before retreating to a close of $41 in mid- December, a 193-percent increase over its J.P. Morgan & Co.-led offering of $14.
After being idled by market conditions just two weeks earlier, theglobe.com was perhaps the poster child for irrational investing. The New York-based operator of an Internet community site saw its stock touch $97 in its first day of trading after freeing its Bear, Stearns & Co.-led syndicate at $9.
The rationale for the interest in recent Internet initial public offerings is clear: The rise in the secondary valuations affords them an opportunity to make a bulk purchase of stock at a fixed price.
The reason for the stock's strong surge in the aftermarket, however, is attributable to a combination of the issue's small floats 2.1 million shares in the case of EarthWeb, and 3.1 million shares in the case of theglobe.com and pure speculation on the part of retail investors. The bulk of aftermarket trading has occurred in small, 100-share and 200-share lots. That's clear proof of retail trading influence, says Ray Murray, director of trading at Minneapolis-based Investment Advisors.
"Clearly, there has been a little bit of a speculative frenzy in some of the recent [Internet] IPOs," added Ryan Jacob, portfolio manager of The IPO Internet Fund.
Indeed, Nasdaq and some trading firms have been clamoring to stifle the volatility connected with IPOs for Internet-based companies. New trading rules will likely make it harder for stock prices to surge in early IPO trading, only to irrationally sink later well below their stratospheric highs.
New Year Outlook
Meanwhile, the dynamics behind investors' love for the Internet a growing familiarity and comfort in Internet-based transactions, consumer access to low-cost computers and increasing amounts of time spent by users at each site isn't likely to change throughout 1999.
"I think it's important to note that we didn't see that much of a drop in a traditionally seasonally-slow third quarter," Jacob said.
An alternative strategy to chasing the industry leaders is to pursue second-tier companies that have exposure to the Internet's growth, but have evaded investment radar screens due to expectations of seasonally-slow fourth quarters.
Benjamin cited examples like CNET (Nasdaq:CNET), a direct competitor to EarthWeb; Preview Travel (Nasdaq: PTVL), which didn't book most of its fourth-quarter revenues until the end of the quarter; and SportsLine USA (Nasdaq: SPLN), an Internet-based provider of sports information, which has lost traffic due to the National Basketball Association lockout.
