Clearly, there has been a tremendous interest in investing in pure internet-related companies, parti...
Clearly, there has been a tremendous interest in investing in pure internet-related companies, particularly over the last 18 months.
I think one of the original catalysts for this was the emergence of clarity and power in AOL's financial model. This triggered a wave of enthusiasm for the business to consumer (and consumer to consumer) internet stocks which lasted until April 1999. During this phase, and in fact for some months after that, there was a huge raft of business to consumer companies which came public to great, initial investor enthusiasm - companies like iVillage, eToys and MarketWatch.com. Where are the shares of these companies now?
What is evident today is that the distribution of relative valuations (and market capitalisations) is highly skewed. There are very few extremely high valuations. This is completely logical, as first mover advantage, the creation of sticky mindshare and therefore scale as measured by web traffic has accrued to very few companies. After eroding through the summer months the few really dominant business to consumer companies rallied very sharply into year end 1999 - beneficiaries of consumer interest and Christmas spending via the internet. It is important to note that for any fund manager benchmarked against the S&P Composite Index, the only real decisions which need to be made in relation to internet stocks are on AOL and Yahoo, which together constitute 1.7% of that index's total capitalisation.
The real fun in the internet space since last spring has been in the business to business area. The wave of public offerings began then and reached tidal wave proportions in the final quarter of 1999.
The business to business e-commerce market is currently forecasted to be in the region of $1.3 trillion by 2003 which is an order of magnitude larger than the business to consumer e-commerce opportunity. However, what investors were willing to ignore as these stocks rose, but will not ignore as they fall, is the simple fact that the operating risk profile of these business to business internet stocks is far higher than for stocks like AOL and Yahoo, which are essentially media companies.
There are countless different niches where e-business solutions are required, but the vast majority of fund managers do not have access to venture capital pipeline knowledge nor can they isolate the various niches to determine the best prospective investments.
Many business to business internet stocks will never again see the stock prices attained in early March.
Retaining a general technology structure makes sense but the next few months are liable to be rocky.
Nevertheless, this will create some excellent long term opportunities in the business to business internet arena.
Geoff Paton, head of North American equities, Abbey National Asset Managers
Paul Bruns and Elaine Parkes
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