Clicking on banner ads enables JWR to constantly improve
Jewish World Review April 9, 2002 / 28 Nisan, 5762

James K. Glassman

Jim Glassman
JWR's Pundits
World Editorial
Cartoon Showcase

Mallard Fillmore

Michael Barone
Mona Charen
Linda Chavez
Ann Coulter
Greg Crosby
Larry Elder
Don Feder
Suzanne Fields
Paul Greenberg
Bob Greene
Betsy Hart
Nat Hentoff
David Horowitz
Marianne Jennings
Michael Kelly
Mort Kondracke
Ch. Krauthammer
Lawrence Kudlow
Dr. Laura
John Leo
David Limbaugh
Michelle Malkin
Chris Matthews
Michael Medved
MUGGER
Kathleen Parker
Wes Pruden
Sam Schulman
Amity Shlaes
Tony Snow
Thomas Sowell
Cal Thomas
Jonathan S. Tobin
Ben Wattenberg
George Will
Bruce Williams
Walter Williams
Mort Zuckerman

Consumer Reports

The Dot.Con con game

http://www.NewsAndOpinion.com |
Almost since it went public nearly five years ago, the online retailer Amazon.com has been a poster child for Internet skeptics. How, they groused, could a new company selling books over the World Wide Web be worth more than Sears, Federated Department Stores, Saks, and Nordstrom combined? To the critics, Amazon was an absurd manifestation of the high-technology bubble.

In some ways, it was. Amazon sold its first public shares in May 1997 at $18 apiece. Two and a half years later, the stock had split three times, and the price had soared to $113. An investment of $1,800 became $135,600. Then within another two years, the share price had crashed to $5.50. The $1,800 nut was then worth a less stratospheric $6,600.

Amidst this roller coaster ride, however, Amazon had strong fundamentals. It was built on a great idea, had excellent management, and good finances. Amazon's founder, Jeff Bezos, spent billions to develop a strong brand and excellent customer service. Now that strategy seems to be working. On January 22, Amazon announced it had just completed its first quarter in which revenues exceeded expenses.

Amazon's official earnings, after taxes and interest, were $5 million for the three months ending in December 2001. It lost $526 million for the year, but that compared with a $1.1 billion loss in 2000. The company finished 2001 with a cushion of $996 million in cash and marketable securities. With this news, Amazon stock jumped to about $14, indicating the market valued the company at $5 billion.

The triumph of Amazon comes at a time when Internet naysayers are crowing over what they see as the popping of the Internet bubble. New books like Dot.Con, by John Cassidy of The New Yorker, contend that the technology boom was a put-up job by stock promoters. That's nonsense. Technology tends to be overestimated when it is brand new and underestimated after the early excitement fades. Certainly, there was too much enthusiasm a few years ago, but there is too little today.

Look at eBay, the online auction house. When it went public in September 1998, two years after its founding, it was already profitable. In 2001, a recession year, sales rose 74 percent to $748 million, and profits roughly doubled to $90 million. Dell Computer, which sells computer hardware over the Internet at exceptionally low costs, is now making $2 billion in annual profits on $30 billion in sales.

Yahoo!, the Internet portal, makes most of its money selling advertising?a difficult endeavor in 2001. Yahoo!'s profits fell last year to $41 million, from $291 million?but it was the company's fifth profitable year in a row, and sales, at $717 million, were still impressive. Like eBay, Yahoo! has mountains of cash and no debt.

But investors did overestimate Yahoo!'s value: At one point in 2000 they bid its share price up to $250. Less than two years later, it had fallen to $8. Still, an investor who put $10,000 into Yahoo! when it went public in April 1996 had shares worth $66,145 on March 5, 2002.

It's the nature of start-up companies to die by the thousands. Only the fittest thrive. The risks are enormous, but so are the rewards. An investor who put $10,000 into Dell in 1991, three years after its IPO, had $1 million in stock a decade later. Was it really so crazy to take a chance on Amazon, in the process valuing it higher than Sears? Few expect Sears to increase profits more than about 5 percent a year, but Amazon, having invented a new way to sell things, could, in a relatively short time, earn $1 billion annually on $20 billion in revenues.

In an important speech last year, Stanford economist Robert Hall stated that "The pricing of new technology companies tries to avoid the error of Microsoft?a dollar invested in Microsoft stock in 1990 resulted in a claim of $1.38 in after-tax earnings in 2000 alone. Obviously, the market in 1990 guessed absurdly low about Microsoft's cash-flow growth."

In other words, with early-stage technology firms, pricing is not easy. Hence, the market's volatility. Dot.Con author Cassidy claims that the tech bubble was the result of marketing, some of it crooked. Certainly, there was overselling?that always happens on Wall Street. But there was underselling, too, as in the cases of AOL, Microsoft, and Dell.

Sometimes investors get the prices right, and sometimes they get them wrong. But the tech boom was hardly just a scam. Denigrating technology can only hurt the U.S. economy.


JWR contributor James K. Glassman is the host of Tech Central Station. Comment by clicking here.

Up

03/21/02: The companies you keep
02/28/02: Trusting monopolists
02/22/02: How not to get taken when buying stocks
02/06/02: Investing After 9/11
01/30/02: Blue Light Specials? Advice on snapping-up K-Mart or Enron stock
01/24/02: Dare to be obscure
01/16/02: Bank on this
01/10/02: What goes down...
01/04/02: An asset-focused investor finds 'deep value' stocks
12/26/01: High-Tech Funds Low On Tech
12/19/01: Tech Sector: Blodget, Meeker, and You
12/12/01: Enron's lessons: Be skeptical of experts
12/04/01: CLECs alive and well, but not if Tauzin-Dingell passes
11/15/01: The "Next Big Thing" in Technology?
10/30/01: A National I.D. Card? Yes; Run By Larry Ellison? No
10/25/01: Without Bayer, we're bare to bioterror
10/18/01: The Battle of Biotech
10/05/01: Two Techs for Tough Times
09/26/01: The Information War
09/05/01: Tech firms built to last through tough times
08/23/01: Stocks on the A-List
08/17/01: Labor and management finding online learning to their liking
08/08/01: Game makers poised to profit
07/19/01: Trade Promotion Authority: High-Techís Key Component for Competitiveness
07/12/01: Nothingís arbitrary about the contrarians
06/27/01: Look to Politics to Find Broadband's Market Cap Shortfall
06/22/01: Tech Commodity Buys Available for Mining
06/18/01: The Blackout Portfolio
06/14/01: The conservation myth stars as latest (sub)urban legend
06/07/01: Will America go high tech on the high seas?
06/05/01: 'Price gouging' doesn't cut it as reason for rising energy prices
06/01/01: Authentication tools opening up opportunities in online security
05/25/01: 'Price gouging' doesnít cut it as reason for rising energy prices
05/21/01: Banking on High-Tech Education
05/17/01: It's No Time to Go Wobbly on Kyoto
05/02/01: Diversify with techís leaders
04/26/01: To Revive The New Economy, Release A Chokehold   —   Break Up The Bells
04/24/01: Whoís To Blame For Broadband Crisis? Wired Article Points To Bells
04/19/01: The Bush Budget
04/12/01: To revive The New Economy, release a chokehold --- break up the Bells
04/04/01: Even as stocks have fallen, the Net keeps booming
03/28/01: Whereís The Profit In Biotech Future?
03/22/01: The Joy of Debt: The last thing we should want is a U.S. Treasury flush with cash
03/19/01: 'Defensive' Stocks in the NASDAQ
03/15/01: Bush administration must say no to Jane and Kyoto
03/08/01: Time to buy small caps? Consider these five great techs
03/01/01: Billís and Larryís continued political adventures
02/26/01: Chips on the Dips?
02/23/01: How Tauzin Can Keep His Word And Stop Telecom "Remonopolization"
02/13/01: Consumers, WAKE UP! Middlemen are ripping you off
02/02/01: Publicity-Seeking Politicians and Contingency-Fee Lawyers Corrupt the Law
01/26/01: DoubleClick, eBay And Their Promising Ilk
01/24/01: Will Cyberspace Look Like France or America?
12/27/00: Cut interest, taxes and regulation to save high-tech economy
12/20/00: Close, But No Big Czar
12/15/00: A Down Year? Maybe. But Letís Put It in Perspective
12/13/00: Clintonís sorry midnight race into history
12/07/00: Is Telecomís Future The Bells, The Bells, and Only The Bells?
12/01/00: Money talks and walks in election aftermath
11/29/00: Climate Treaty Deadlock Shows Lack of Consensus and Common Sense
11/23/00: Climate change participants donít listen to reasons for uncertainty
11/21/00: Will Regulators Create a Recession?
11/14/00: The Election and the Market
10/26/00: Hang on for the long term
10/25/00: On privacy, one size doesnít fit all
10/24/00: Perish the bearish thought
10/19/00: Beating hunger --- the biggest prize
10/13/00: Way to play biotech
10/12/00: Bush vs. Gore on Technology
10/11/00: Global Climate Scare: Fools Rush In
10/05/00: Avoid the Apple Trap
10/03/00: Goodbye, anti-Microsoft crusader --- and good riddance
09/29/00: Should You Invest in Tech IPOs?
09/27/00: Could technology end airline delays?
09/22/00: Donít Forget Small Caps
09/20/00: Is the New York Times Rooting for Disaster?
09/13/00: The Best Argument Against Net Regulation
08/30/00: Political Risk in Big Drug Stocks
07/27/00: Tech Dividends
07/25/00: Government Privacy Violators
07/20/00: If I Had to Pick One Tech Stock
07/18/00: Our Favorite Lawsuit
07/13/00: Silicon Valley East
07/11/00: Election 2000: Year of the Investor Class?
07/07/00: Adventures on the Amazon.com
07/06/00:The Difference Between Bill Gates and Larry Ellison
06/29/00: In the Chips
06/27/00: Free market wins in Federal Court!
06/22/00: Wireless Bargains?
06/20/00: Is Your SUV Warming the Planet?
06/15/00: Shopping for Government
06/13/00: Top 10 Tech Stocks
06/08/00: Riding the eBook Wave
06/06/00: "The Last Mile"
06/02/00: Keep Buying!
05/31/00: Who Asked the FTC to Regulate Online Privacy?
05/25/00: "When Itís Time to Sell"
05/23/00: End the "Telephone Tax"
05/16/00: Time Warner Gets a Bad Rap

© 2002, Tech Central Station