Heroes Of A Wild And Crazy Stock Ride

By John Greenwald

Not since Bill Gates took Microsoft public in 1986 has Wall Street witnessed anything like the wealth-creating power of today's Internet stocks. Consider Amazon.com an online bookseller that has lost more than $30 million since 1995 with nary a penny of profit in sight. No matter. Amazon's $5 billion in market value exceeds the combined capitalization of Barnes & Noble and Borders Group, the two largest U.S. bookstore chains. The rise of No. 1 search engine Yahoo has been no less phenomenal. It stood at $181 a share last week after reporting second-quarter earnings of $8.1 million--following three straight years of losses. Ten thousand dollars' worth of Yahoo purchased at IPO in 1996 would be worth $1.68 million today. "Investors are treating the Internet as if it were the next television industry," says economist Lawrence White of New York University's Stern School of Business.

But is it really? Or are frenzied investors merely cruising for a bruising fall? "If there's ever been an example of a mania, this is it," says Hugh Johnson, chief investment officer of the First Albany brokerage firm. "There's a pretty exciting future for companies on the Internet. But these stock prices are irrational." Not that rationality has ever counted for much on Wall Street, which prefers hopes, dreams and whispers when it looks ahead. As venture capitalist J. Neil Weintraut puts it, "There is no reasonable way to value these companies." Still, professional analysts have to try. And few want to buck the trend: last week Donaldson, Lufkin Jenrette analysts raised their price target on Yahoo to $250, positing another 25% gain within the next year.

The folks most easily seduced by such visions tend to be small investors, who often buy and sell online, sometimes many times a day. "The bulk of recent trades have been for well under 1,000 shares," says James Preissler, who follows the Internet for Paine Webber. And because there are still relatively few shares of Internet stocks available to the public, such purchases can pack a hefty punch. That guarantees that any rise in the demand for a stock will have a sharp impact on its price. For example, much of the volatility of Amazon.com comes from the fact that less than half of the company's 49 million shares are actively traded. Founder Jeff Bezos controls 41%, and an additional 12% is in the hands of the venture-capital firm Kleiner Perkins Caufield and Byers.

These high, demand-driven prices become, in a sense, a self-fulfilling prophecy. So-called short sellers--speculators who borrow stock and then sell it in the expectation that its price will drop--have been furiously buying back shares in recent months to cut their losses as the stock goes up. But such panicky buying only serves to raise prices higher still. So do hopes that a FORTUNE 500 giant will pour big bucks into an Internet company. Disney did just that last month when it acquired a 43% stake in InfoSeek, the third largest Internet search engine, in a widely watched transaction that valued Infoseek at more than $1 billion.

Not all of today's hot Internet stocks will wind up winners, of course. Case in point: Netscape Communications, whose Navigator browser was the first commercial software to link computers to the World Wide Web. Netscape stock jumped from $28 a share to $87 when the company went public in 1995, but it sank to just $15 earlier this year. (Netscape closed at $36 last Friday in the wake of rumors that a behemoth like Time Warner might make a bid for the company. Time Warner denied that it planned to do so.) "There's a lot of momentum buying right now," says Alan Braverman, an Internet analyst for Credit Suisse First Boston. "People go to [Internet] chat rooms" to talk about stocks. "The stock goes up, and they buy more of it." That's great for titans of the Internet. But many small investors are likely to head for the electronic exits once the momentum stops.

--With reporting by Daniel Eisenberg/New York

With reporting by DANIEL EISENBERG/NEW YORK