Metcalfe's column: Day of reckoning arrives

On November 8, 1999, the Internet stock bubble burst, or so I've been predicting since April.

I'd been warning about Internet stocks since March 15 (see http://www.infoworld.com/metcalfe). But it was on April 15, during a National Venture Capital Association panel at Boston's Ritz-Carlton, and in this column on April 26, that I first announced the November 8 stock burst.

Now, follow my verb tenses carefully. I'm writing this column a week ago, on October 31, just before attending Weird Al Yankovic's Halloween Concert in Portland, Maine. So I can't say how exactly right I am. All I have are stock data from the market close on October 29.

October 29? Yes, we just passed the 70th anniversary of The Great Stock Market Crash of October 29, 1929. That Black Thursday ended The Roaring Twenties and began The Great Depression. On that one day, the Dow Jones industrial average dropped by 13 percent.

Funny, but The Wall Street Journal just last week updated the Dow Industrials by replacing Chevron and Sears with Intel and Microsoft. Intel and Microsoft are not Internet stocks, but they've arrived among the Industrials just in time to drag the Dow down.

But forget the Dow; let's use the Internet Index at www.thestreet.com. Its 30 Internet leaders rocketed during early 1999, from December's low of 302 to a high of 824 in, yes, April. After I predicted the burst, the index turned south and, by August, was back down into the 400s.

Many said then that the Internet bubble had burst. But not me. On August 30, I reiterated my November 8 prediction.

In the September issue of Red Herring magazine (www.redherring.com), Editor Anthony B. Perkins looked at the 133 initial public offerings (IPOs) of Internet stocks since Netscape in 1995. Their combined market capitalisation (share price times number of shares outstanding) was then $410 billion, which is impressive. Annual revenues were not so impressive at $15.2 billion. Even less impressive were the profits of these companies, at a loss of $3 billion.

Perkins calculated that, to be worth their August prices, assuming profits of 5 percent to 15 percent and price-to-earnings ratios at 40, the Internet IPOs would have to grow their revenues by 80 percent per year for the next five years.

Consider that Microsoft grew 53 percent its first five public years and Dell grew 66 percent. Even assuming Dell's growth, the size of the Internet bubble came out as an excess market cap of $130 billion, or 33 percent.

So, in September, Perkins said sell, whereupon TheStreet.com's index turned up, from August's 400s to 750 on October 29.

Akamai was yet another sign. This fine Internet company was founded 14 months ago by people whom I know from around the MIT Laboratory for Computer Science. Akamai generated $1.3 million in revenue for the nine months ending on September 30.

Morgan Stanley priced Akamai's IPO at $26 per share. On the big day, October 29, the 250-employee company's new stock closed at $145 per share, giving it a market cap of around $13 billion, less than Chevron but more than Sears.

The Weird Als who buy Internet IPOs saw interest rates not going up much and must have thought, hey, Akamai is worth five times more than what Morgan Stanley just estimated. This makes me think that investing in Internet stocks is beyond gambling; it's more like rooting for sports teams. So we should ask, "How do you like them Akamais?"

Now, hot off the presses, sight unseen, I recommend The Internet Bubble: Inside the Overvalued World of High-Tech Stocks -- and What You Need to Know to Avoid the Coming Shakeout, by Anthony B. Perkins and Michael C. Perkins. They warn investors to get out while the getting is good, which, according to my prediction, was before November 8, 1999.

Technology pundit Bob Metcalfe's job hangs in the balance. If the Internet stock bubble didn't quite burst on November 8, please send outpourings of heartfelt support to his editors at letters@infoworld.com.

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