Wall St. Opts to Go Up the Food Chain for Internet Ideas

By TOM PETRUNO

Nov. 14, 1999 12 AM PT

If Satan is still in the business of buying long-term souls for short-term favors, someone ought to check whether his name is in the visitor log at the Nasdaq Stock Market’s headquarters.

The main Nasdaq stock index on Friday scored its 10th record close in 11 sessions, finishing at 3,221.15--for a gain of 18% in just four weeks.

Year to date the index is up 46.9%, a performance which, had it been mirrored by the Dow Jones industrial average, would have us readying Dow-14,000 party hats by now.

As it stands, even though the Dow’s keepers recently took a page from Nasdaq’s book--adding tech heavyweights Microsoft Corp. and Intel Corp. to the venerable index on Nov. 1--the Dow still looks like a piker in comparison. At 10,769.32 on Friday it was up 0.6% for the week and 17.3% for the year.

Nasdaq, of course, is synonymous with technology stocks, and that sector needs little introduction if you’ve been paying even the slightest attention to Wall Street lately.

Apple Computer was a $66 stock five weeks ago. Now it’s at $90.63. Hardware and software networking firm Sun Microsystems has surged from $92 to $119.31 in the same period, while database software giant Oracle Corp. has rocketed from $46 to $65.13.

Interestingly enough, the recent gains for these established technology leaders haven’t been matched by the Internet sector’s most familiar stars. In fact, Amazon.com, the onetime Net bookseller now selling all sorts of other stuff as well, has fallen from $88 to $74.94 in the last five weeks.

Likewise, online auction site EBay has slumped from $150 to $136.88 in that time frame, while toy seller EToys has slid from $84 to $53.44.

The market, it appears, has for now shifted its focus from young, mostly money-losing Net niche companies--and, specifically, from those that are best known as consumer e-commerce plays--to established technology companies whose products and services are key to e-commerce’s broader applications.

Some Wall Street pros say that shift is a logical one, at least for investors who are trying to take a long-term view of the potential payoff from the transition to a largely Internet-based economy.

Much has already been written about the estimated size of the consumer e-commerce market versus the business-to-business e-commerce market.

Mohanbir Sawhney, a professor at Northwestern University’s Kellogg School of Management, has put the size of the business-to-business market at 10 times that of the consumer market.

A year ago many skeptics were still referring to the rise of the Internet as a mania--something akin to the 1970s’ CB radio craze that came and (thankfully) went.

That view was absurdly shortsighted, and it generally was derived from a belief that use of the Internet was, for the most part, a consumer fad.

What we have seen this year, however, is the embrace of e-commerce by virtually every major U.S. company, and by many worldwide.

A week ago, General Motors said that it will move all of its $87 billion in annual supply purchases to its e-commerce Web site by about 2002--and that it will twist the arms of its suppliers to be transacting on the Internet with more than just GM.

Why? For transparency and for critical mass. Both are crucial if business-to-business e-commerce is to live up to its promise of reducing costs and speeding efficiency.

A. Marshall Acuff, veteran investment strategist at brokerage Salomon Smith Barney in New York, recently wrote an excellent summary of how Wall Street expects e-business to change all business.

The ultimate success of e-commerce, Acuff wrote, hinges on “developing an effective e-channel that fully integrates the customer, manufacturer, suppliers and retailers.”

That model, he noted, has been successfully implemented by such companies as Dell Computer and computer networking kingpin Cisco Systems in their own businesses. Now it’s the dream of companies such as GM that see the Net as a way to eliminate the cost of searching for supplies and as a place where the cost of quickly switching from one supplier to a better one may be negligible.

Today, “While anyone can establish a Web presence, few . . . are fully integrated and capable of executing consistently,” Acuff said.

But the development of “e-hubs” such as GM’s, Acuff said--”cyber-marketplaces that aggregate supply and demand, increase liquidity and reduce transaction costs”--should drive that integration process.

Astute investors, of course, have already tuned into the idea that the builders of these e-hubs--the creators of the Internet’s infrastructure--may be exceptionally more interesting as investments than many of the pure-play consumer e-tailers.

Commerce One (ticker symbol: CMRC), a Walnut Creek, Calif.-based provider of software that creates business-to-business e-commerce sites (GM, among others, is a customer), went public at $21 a share in July. The stock closed on Friday at $307.

But Commerce One, like most young Internet-related companies, has yet to earn a dime. The stock, understandably, now is far too rich for many investors’ tastes.

What the latest rally in the biggest names tied to the ongoing buildup of the Internet infrastructure suggests is that many investors have decided that they don’t have to take a chance on shares such as those of Commerce One, when they can buy into large, already-profitable companies whose Net market share is substantial and growing.

Acuff, in fact, argues that the established technology companies should benefit “disproportionately” from the e-commerce revolution, relative to many up-and-comers.

He favors such well-known names as Sun Microsystems (SUNW), Oracle (ORCL), Cisco Systems (CSCO), telecom equipment leader Lucent Technologies (LU) and data-storage-device company EMC Corp. (EMC).

All of these, it’s true, are trading at price-to-earnings ratios that used to make people’s noses bleed. And on the fast-changing technological frontier, none of these are slam dunks, even for investors with multiyear time horizons. (Are there any slam-dunk stocks anymore? Nope.)

But if you accept that e-commerce is only in its infancy in the United States and abroad, companies such as these have vast opportunities ahead of them. They also have the financial wherewithal to stay in leadership positions.

If the market gives you the gift of lower prices any time soon, stocks like these ought to be marked in advance for a very close look.

Are we really in the midst of a stock market bubble, as bond-market genius Bill Gross suggests in the story at right?

The accompanying grafic provides a snapshot of the market’s performance as measured by changes in key stock indexes this year.

No question, technology and telecom are in super-heated rallies. But the blue-chip Standard & Poor’s 500 index now is up 13.6% for the year. While certainly respectable, that is below the 16%-plus annualized average return on the S&P; over the last 10 years.

What’s more, if the S&P;’s return for the full year stays in the range of 15% to 20%, that would be below the annual gains of the previous four years.

Looking more broadly at the market, small and mid-size stocks, while rallying handsomely in recent weeks, are eking out just single-digit gains so far this year. And investors in such industry sectors as transportation, utilities and real estate are lucky if their heads are above water at all.

Does that sound like a bubble, outside of technology? Or is it a market that is slowly regaining its footing after an extended period of disinterest in anything non-tech?

A Hot Market--In a Few Places

The widespread perception may be that the U.S. stock market is on fire, but year-to-date most stock sectors are up modestly, if at all. Technology and telecom stocks are far outpacing virtually everything else. A look at year-to-date gains in key indexes:

Interactive Week Internet +93.8%

Nasdaq telecom +66.1%

Nasdaq composite +46.9%

Amex oil +20.2%

Dow industrials +17.3%

S&P; 500 +13.6%

Wilshire 5,000 +13.5%

Nasdaq insurance +13.0%

NYSE composite +6.9%

S&P; 400 (mid-cap stocks) +6.9%

S&P; 600 (small stocks) +2.6%

-0.9% Nasdaq banks