Internet Stocks
The Trader’s U E-Letter: Issue # 158
Wednesday, October 26, 2005
Internet Stocks: Still Partying (and Spending) Like It’s 1999?
by D.R. Barton, Jr., Chairman, Trader’s U
Here’s a quick word association game that will help you understand a bit more about your trading psychology.
When I mention the word “Prince,” you think of:
- Charles, Prince of Wales. A common pick among Anglophiles
- Will Smith, a.k.a. “Fresh Prince.” Well-liked and respected movie star, rapper and TV star. Most popular choice for the younger generations.
- Smoking tobacco. Prince Albert brand: sold in a 14 oz. can (and still available!). A typical selection if you smoke a pipe or played telephone pranks when you were nine years old.
- Prince, who had some good tunes back in the 1980s that combined funk, pop and techno. You probably picked this one if you’re a late baby boomer or if you read the title of today’s article (which is a paraphrase of a Prince song lyric from 1982).
The Internet sector seems to think that it’s 1999 again. But despite the recent mini-boom, not all Internet stocks are good buys. And there is at least one high-profile Internet player that I think you should avoid.
Why Everything Old Is New Again in Internet Stocks
Here’s another little quiz for you…
Guess the years in which the following four news events occurred:
- A huge company buys a small Internet telephony company with no earnings, for an outrageous price.
- Internet start-ups without business plans are funded by huge companies for billions of dollars.
- IPOs are popping 40% for Internet companies with little or no earnings.
- America Online is in the news for making a multibillion-dollar deal.
If you guessed 1999 for any of these, you’re right.
But, if you guessed 2005 for each of these events, you’re right, too!
Cash is being tossed around again in the Internet sector like it was in 1999. eBay just bought Skype (the internet telephony upstart) for what many consider to be an outrageous price. Yahoo! has invested billions in Chinese Internet companies, some that admittedly have no business plans. WebMD just launched an IPO that was up 40% in the first two weeks of stock trading.
And then there’s AOL. Many folks consider AOL’s purchase of Time Warner to be the “beginning of the end” of the first Internet bubble. At the time, it was the largest merger in history. And now, AOL is the focus of another multibillion-dollar buyout. Only this time, AOL is the target for the bidding.
The three other Internet Goliaths (Microsoft, Google and Yahoo!) are looking to merge, partner or buy AOL. For the AOL holding-company’s stock, Time Warner, Inc. (NYSE: TWX), this should be great news.
But the problem is, the stock is doing nothing, going nowhere fast. With three huge, cash-rich companies bidding for one of your prized assets, this is bad news.
Here’s TWX since April:
As an Internet stock, TWX has quite a few problems
One of the biggest problems is an old story on Wall Street. Since the company does so many things, it is hard to evaluate which pieces are performing well, especially relative to their peers.
The main slices of the TWX pie are:
- AOL (Internet portal and dial-up connection king)
- Warner Brothers (movies)
- Time publishing (magazines, etc.)
With so much going on inside the company, the big question becomes, “How much of the corporate profits are from each division?”
The best guess that I’ve seen is that AOL makes up 20% of revenue – somewhere around $8.5 billion. So, AOL is not the prime mover of TWX stock.
The Bottom Investing Line
If you’ve been hearing a lot about a possible buy-out or merger with former giant of the Internet AOL, don’t pour lots of money into TWX stock expecting to make big bucks on a takeover.
There are some other interesting things happening in the world of Internet stocks. Next week, we’ll take a look at the AOL suitors: GOOG, YHOO and MSN, along with some other Internet heavyweights, like eBay and Amazon.com, to see if the fundamentals and technical analysis can give us any clues about where to invest and what to avoid. Until then…
Today’s TU Tips & Tricks
- If you’d like a really great read about the impact of the Internet on a wide range of topics, including investing, check out Michael Lewis’ book, Next: The Future Just Happened. The section about the high school teen from New Jersey who made $800,000 in six months using supposed illicit tactics is worth the price of the book.
The Chart of the Week
As you can see in the chart above, QUALCOMM (Nasdaq: QCOM) is testing the zone from the high that it made in late September. Do you like it as a breakout play (continuing up), or a failed test that will drop from here?
Great trading,
D.R.
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