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Saturday, January 28, 2006

Net Tech Turbulence (GOOG, EBAY, YHOO, Etc...)

I've been watching the news roll by lately and I think we're in the beginning of a valuation bleed out. What do I mean by this? Well, I think the last two years have been education for investors regarding the power of Internet-based business models. Clearly, Google's launch has turned a lot of heads in the investing world; maybe too many. Now we have a rush of equity capital into the sector. GOOG, YHOO and EBAY are now well-entrenched in the largest mutual funds and market ETFs; GOOG is 2.67% of the "iShares Morningstar Large Index Fund" (JKE).
This means that they automatically get equity demand regardless of their fundamental peformance or valuation. Inclusion on indexes is not based upon investment decision, it's based upon factors such as how many people hold an issue, market cap and trading volume. And once they're included in indexes, they're stock will experience increasing demand as ETFs and Index funds become more popular. More individual investors are giving up on picking stocks and buying ETFs because its easier and "safer". More advisers are doing the same thing because of all of the literature that demonstrates you can't outperform the market. Hey, I'd do the same thing if I hadn't proven to myself that I outperform the market by a wide margin.
So, now you have stocks with valuations that imply amazing performance for the 20 years. The problem is that we're going to enter into a period where information enters the market and illustrates that these companies will face issues just like every other company that has graced the face of the earth. For instance, here are some major negative themes that I think could impact the Big Nets:
  • Google - "May not walk on water." We've heard that they're a one-trick pony (search). What we haven't heard is how badly they've screwed up some of their initiatives.
  • eBay - "Quasi-governmental agency" Hey, we just make markets, we're not responsible for any of the content. Good theory, ain't gonna work in practice eBayers. Welcome to the world of social responsibility - watch it add to your SG&A expense line item. Wait until the market figures that one out...
  • Yahoo! - "The CFO doesn't know what she's talking about. Don't mind her, it's probably the medication..."
  • Competitive Search Engines Get Funding
    • Check out Kosmix - it's pretty good, better than Google IMHO. (H? Who am I kidding?)
I guess my basic point is that the warts are starting to show and the sexy young teenagers are getting their freshman 15. The laws and fundamentals of business always apply, they just sometimes take time showing up. Unfortunately, the sector is valued as if no one can do any wrong...


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