In recent weeks, Internet and technology shares have taken a battering in what many see as a normal market "correction" - and others the start of a long, hard and well-deserved fall from vastly overhyped glory for a sector whose shares often seem to have no visible means of support. The most recent slump followed off-the-cuff but remarkably candid remarks a week ago by Microsoft president Mr Steve Ballmer, who not only stated that the sector as a whole was inflated but that (gasp!) even Microsoft shares carried their share of virtual fat. The Nasdaq collectively shuddered and the market headed south - to a 108-point fall in a single day. (Let's set aside the unedifying fact that perhaps only in the tech industry could a statement of the obvious by a key, tech-industry figure qualify as candidness).
It's not just US tech shares that are suffering. The typically much younger and more inexperienced European companies in this sector are getting kicked around as well. And it seems only yesterday that British free Internet service provider Freeserve was seen as the bellwether of a brave new European technology market.
Of course, it was almost yesterday. Freeserve's hugely successful initial public offering (IPO) was a mere two months ago. As a result of enormous pre-launch hype - who could downplay Europe's first big Net IPO? - the offering was oversubscribed, and the share price shot up from an opening 150p to a 37 per cent premium of 205.5p at closing. In the warm, post-launch afterglow, analysts valued the company at anywhere from hundreds of millions of pounds to over a billion. Europe looked set to start growing its own batch of Internet millionaires.
This week, in a sorrowful tale familiar to owners of Eircom shares, the stock price dipped below its flotation price. Some observers, especially in the far-moreNet-sceptical environment of Europe, have turned into bossy, gleeful I-told-you-so's. But that's shortsightedness from people who continue to evaluate the unpredictable and groundbreaking Internet industry in terms of business norms that are, quite simply, anachronistic. How do you measure an industry that has no antecedent, no certain business model, no clear path towards the future? About all that is understood is that the Internet is the future and will affect nearly every area of endeavour in ways that are only beginning to define themselves.
The market recognises this and thus highly values many of the companies that launch, despite the fact that they seem to have so little going for them. Anyone trying to make sense of this should read Mr Richard L. Brandt's September 24th column at www.upside.com, the website of the Silicon Valley technology and business magazine Upside. In his piece, he presents the insights of another tech pundit, Mr Geoff Moore, who believes that, while technology and Internet stocks are overvalued, the sector, especially the Internet industry, is undervalued. Why? First, he says, the Net is going to create a huge shift in capital from old-style companies to those that are online. Online companies will also enjoy increased revenues due to cost savings and "marketing efficiencies".
Investors realise this and are pushing money into the technology and Internet sector. But there's more demand than supply in the Net stock market - too few companies in the young industry and too many people willing to bet on any slice of the future. "It's just a little too far in the future," argues Mr Brandt.
As he says: "The current companies alone will not generate all that new wealth. But they get all the investment dollars anyway, because an Internet-hungry public has no place else to put it." Of course, some of those companies will fail completely because they are essentially weak or they will offer a service or product the market decides it doesn't want or for any of a number of other banal business reasons - some things, at least, won't change.
One of the losers might be Freeserve - perhaps free Internet access is not going to be the basis of a viable business model downstream. But Freeserve's difficulties at the moment aren't reflecting such concerns, anyway, and are not wholly unexpected. Several Irish share analysts point out that the company launched into a virtually empty space and an immature technology market.
In Europe, there are very few technology companies at all, much less many of significance. In contrast, the US - in which such companies still remain highly volatile - has an established technology industry, a burgeoning Internet market, and lots of venture capital to fund its expansion.
Freeserve shares will undoubtedly rattle around for some time as an entire industry continues to develop. For now, Freeserve is a bit like a lone tree on a windy plain, but the trees are growing into a forest (albeit slowly, according to a persuasive online editorial in the Economist, www.economist.com/editorial/ freeforallcurrent/wb4196.html).
For an insight into what the market really seems to think about such companies, just look at what happened last Friday when a US free ISP called Netzero had its IPO. Despite the "Ballmer crash", despite all the talk about corrections and overzealousness and obese shares rightly put on a bread-and-water diet, Netzero shares rose from a $16 offering price to close at $29.13, leaving the company with a market capitalisation of a stunning $3 billion. That, despite the fact that Netzero lost $15.3 million on $4.6 million in revenue this past fiscal year.
Freeserve seems almost boringly stable, in contrast. And the market, quite, quite unpredictable.
Karlin Lillington is at klillington@irish-times.ie
