Today's Overpriced Internet Stocks Won't Bring Hefty Long-Term Profits
You can't escape Internet Insanity these days. Scarcely a week passes, it seems, without us reading, hearing or seeing a story about how some company most of us never heard of will make a gazillion dollars from the Internet, the international network that lets computers communicate with one another. The world is full of people buying Internet stocks in search of the next Microsoft Corp. But you don't need to know much about Web browsers or servers or other high-technology stuff to see that it's almost impossible for any of today's Internet stocks to be the next Microsoft.</br></br>It's a question of math, not technology. Even with the sharp drops of the past three trading days, stocks of Internet companies are trading at levels I consider insanely high. If you overpay for the stock of even a very good company, it's almost impossible to make a superior long-term profit. And long-term profit is what we small nonprofessional investors should worry about. You short-term types, find a different article to read.</br></br>The simplest illustration is Netscape Communications Corp., which sold stock in August at $28 a share and currently sells for almost five times as much. Netscape's backers says the company will use its World Wide Web browser technology (which lets you find things on the Internet) to dominate the Internet the way that Microsoft parlayed its operating system technology into domination of large parts of the PC software business. But even if Netscape ends up wildly successful, it's virtually impossible for anyone buying Netscape stock at today's prices to get a Microsoft-like return. Here's why. If you bought 100 shares of Microsoft at its initial public offering in 1986 for $2,100, you now own 1,800 shares worth $158,400 at yesterday's closing price. Call it a 75-to-1 return in just under 10 years.</br></br>Netscape closed yesterday at $130.25 a share. For you to make a 75-to-1 return in less than 10 years, Netscape stock has to rise to almost $9,800 a share by the year-end of 2004. Its 40.8 million shares (including stock under option, as do all the valuations in this article) are valued in the stock market at around $5.3 billion. For you to buy now and make a Microsoft return, Netscape shares have to be worth almost $400 billion in less than 10 years.</br></br>How much is $400 billion? It's more than seven times the current value of all the shares of Wal-Mart Stores Inc. or Microsoft. About 13 Walt Disney Cos. Almost as much as General Electric Co., Exxon Corp., AT&T Corp. and Coca-Cola Co. combined. You don't need a doctorate in higher mathematics to see that's sort of unlikely.