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'98 Year In Review
December 17, 1998

Internet IPOmania

by Nico Detourn (TMF Nico)

The Internet grew in 1998 -- both in usage and in the sophistication of its offerings. There was growth in our acceptance of it in our lives, and in our expectations of its many promises -- promises being something the Internet has never been reticent in making. The more the Internet talks, the more we listen, and the greater our expectations and belief. The Internet made a lot of noise over the last 12 months. In fact, it never shut up. And with all that -- because of all that -- there was a corresponding growth in the Internet's notoriety. Which only adds to its attraction.

An interesting thing about notoriety, or a bad reputation, is the way it can take on a life of its own, creating a "false truth" that displaces whatever might have been there to begin with. Of course, the Internet doesn't give a hoot about its reputation or what we think and say about it. It's enough that we keep talking. The hungry egomaniac is happy to oblige us with bits and bytes for the mill. And why not? The Internet is the mill.

In its efforts to keep us interested, the Internet is impressively prolific in turning out new killer apps. Occasionally something truly unique comes along. More often, they're just new and improved variations of the tried and true that, when you come right down to it, are probably the most lethal apps of all. That's how they become the most tried and truest.

These are the conditions that, by 1998, found online investing parked squarely at the intersection of Main and Wall.

The connection between the growth of the Internet and of online investing is about as seamless as it can get. Although hazy, there is a legitimate recognition that a new frontier has been opened, creating new possibilities. This meshes with a basic human desire to get in on the action. It's a potent mix. More growth, more new companies, more opportunities. It's easy. It's exciting. If only it always worked out that way.

Somewhere between Netscape's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: NSCP)") else Response.Write("(Nasdaq: NSCP)") end if %> New Year's 1998 Resolution to be a better... whatever it was they were going to be... and Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> reporting first quarter earnings that were 100% (or 2 split-adjusted pennies) above estimates, the already hot market for Internet stocks went critical.

Maybe it was all those new Christmas computers and the onslaught of discount brokerage ads. Or a collective expression of relief at having lived through the previous October's trade-halting 554-point Dow plunge. Maybe being taunted from on-high by Yahoo!'s exclamation mark and Amazon's dotcom had finally gone on too long. Whatever it was, individual investor's -- the "retail trade," as we're affectionately known -- turned to the initial public offerings (IPO) of Internet companies as a way of hopping the rocket to riches, perhaps making up for time spent on the sidelines.

The first quarter of 1998 produced a string of Internet IPOs whose initial results ranged from so-so to spectacular. (Please click here to see the 1998's Internet IPO highlights and how they've done since going public.) This is just the kind of environment that makes the game seem worth playing. Money for nothing is a powerful lure, and the wave of IPOmania found investors queued behind their monitors for the latest fresh-baked shares.

By mid-summer, the stage had been set for GeoCities <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: GCTY)") else Response.Write("(Nasdaq: GCTY)") end if %>, "the world's largest Web community," and one of the most heavily-trafficked Web destinations. With significant ties to some of online's key players -- including CMGI <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMGI)") else Response.Write("(Nasdaq: CMGI)") end if %>, Softbank Holdings, and Yahoo! -- GeoCities was considered a sure bet for achieving sustained highflyer status, with its long-anticipated IPO having whet the appetite of Internet watchers and investors. After its initial offering price was bumped up from $12 to $17, the new shares opened at $30. It closed at $37 and change. GeoCities gained 22% the next day. And on day three began a two-month descent to the mid-teens.

Cause and effect in the stock market can be difficult to prove. Still, "can't miss" GeoCities went public during a market correction that saw the Dow decline more or less 2000 points, or 20%, from all-time highs. Now, instead of going public, the pipeline flowed in reverse as companies postponed or canceled IPOs, typically citing "unfavorable market conditions," in those or equivalent words. Among the names canceling were, AboveNet, City Search, EarthWeb, Healtheon, NetGrocer, netValue, Prodigy, theglobe.com, Barnesandnoble.com, uBid, and Xoom. And with the market as a whole heading who-knows-where, the cancellation of a bunch of Internet IPOs didn't much matter.

In late September, online auction house eBay <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EBAY)") else Response.Write("(Nasdaq: EBAY)") end if %> bucked the trend and went through with its IPO, rising over 200% intra-day and finishing up 163%. The stock traded calmly down in the following weeks. In late October, both eBay and the broader market started rising, apparently for real, and relieved market participants again turned their thoughts to Internet stocks. But the IPO cupboard was bare. And despite summer's deep pullback in Net issues, most were still trading at what seemed like exorbitant levels by most conventional standards -- and were now headed back up.

Pent-up demand found its outlet in mid-November when Web-based tech-publisher EarthWeb <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EWBX)") else Response.Write("(Nasdaq: EWBX)") end if %>, followed by online community operator theglobe.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TGLO)") else Response.Write("(Nasdaq: TGLO)") end if %>, revived IPO plans that mere weeks earlier had been placed in mothballs. The impact was stunning, as IPOmania sprang out of remission, stronger than ever.

As if fearful of missing their last chance, new investors, often without knowledge of the IPO process, or the basic mechanics of investing, jumped in mouse-first and asked questions later. Indeed, there are a lot of questions one might ask after buying theglobe.com for $97, when it priced the night before at $9. Witnessing this, it was disturbing to find that "How do limit orders work?" was one of the questions most in need of an answer.

Following this episode and in anticipation of its repetition, some online brokerages have placed restrictions on the trading of selected Internet-related stocks. The irony in that is hard to escape. But so is the logic of the policy.

Online investing fully arrived in 1998 as one of the great killer apps of the Internet. Here's hoping the killer might make investment education its partner in crime in 1999 -- knowledge and education being the most lethal and Foolish apps of all.

Related Links:
Internet Stocks Message Board
IPOs & Consolidation -- 11/30/98
e-Bay's Rise -- Fool on the Hill -- 11/12/98
e-Bay Daily Double -- 11/9/98
e-Bay Explodes Again -- 10/27/98

Next Internet Story -- Online Retailers