Tide turns against US Net stocks

It looks like the bubble is about to burst for publicly-owned US Internet companies that have yet to show a profit.

Precocious start-ups saw the first signs of frustration on Wall Street this week, as traders down-valued their share prices. Shares in online broker, AmeriTrade, slipped three per cent after its value doubled during 1998. And Charles Schwab, an online pioneer among established broker firms, fell almost two per cent.

Analysts have long said that new Internet companies are overvalued. Varda Lief, business analyst at Forrester Research, told Silicon.com: "Their meteor is still shining bright, but it has started on a downward arc."

Lief cited a number of reasons for the investors' change of heart. "Research shows that most Web investment is made by a small number of experts. As the recession hits, some of them are losing capital, which has led to a general caution," she said.

"Investors have also become more sophisticated. In the early days, anything with a '.com' address was a sure winner. But now investors are distinguishing between the online arm of an established company, and pure play Web companies. Pure Web companies have more potential because they are forging new markets, rather than putting just three per cent of their distribution into a new channel."

Lief added that as more Internet companies started up, they lost their novelty value and led to a dilution of investment funds.

Amazon.com is, however, still soaring ahead, with a 5.2 per cent growth already this new year, bringing its value to $124.5 on Wednesday. This comes despite the company's warnings of further losses next quarter.

But Lief warned that even pure Web companies such as Amazon.com are not invulnerable to the changing tides. "It has a secure business base but its valuation is astronomical. It is unlikely to keep attracting long-term investment," she said.