Maybe Henry Blodget was just early. Blodget, if you remember, was the Merrill Lynch Internet analyst who predicted that there would be only three or four winners in the Net world. He urged clients to buy a basket of Internet stocks, because you couldn't tell which stocks would win.
Of course, that turned out to be a disastrous recommendation -- compounded by Blodget's fealty to the losers that the Merrill investment bankers pushed on him. Any basket of Net stocks has simply crushed you since that ill-fated prediction. Yet here we are in year seven of Net commercialization, and Blodget's looking mighty right, at least on the number of winners. A quartet of Net stocks -- Amazon, eBay, USA Interactive, and Yahoo -- have broken out. In fact, in a period during which business has stultified for virtually every company, the quartet is showing the type of viral profit and revenue growth that was once so widely promised. All of these stocks are at or near their 52-week highs and have explosive fourth quarters ahead. And in what is a tough admission for this veteran dot-commer, I am kicking myself that I don't own shares in any of them. Perhaps, though, when you consider what's going on at each company, it's still not too late to get in.
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Holy cow, can you believe that Jeff Bezos stayed with this company the whole time? Can you believe he didn't jump ship or ditch the darned thing when the going got tough? Instead, he dug in his heels and created the best international hard-goods retailer in the world, save Wal-Mart. Now it's ready to move into apparel, and if its CD and photo-equipment businesses are any gauge, it could pull off that difficult transition without a hitch.
And yet the analysts still say Amazon's growth is unsustainable. Those who loved Bezos when the stock was in the hundreds now hate him! What hogwash! Amazon's set to have the biggest Christmas ever. It posted a spectacular $27 million profit in the almost always horrid third quarter. In short, Amazon has won. Winners deserve higher stock prices. I can see Amazon -- now trading in the high teens -- trading in the high twenties by this time next year.
Who would have figured that America was going to ditch classified ads, suspend yard sales, and decide to sell everything online? Who would have foreseen that so many would get comfortable buying used goods from people they don't know? Meg Whitman did. The redoubtable eBay CEO has created a colossus that exploits the Net's best feature: the interactivity (in eBay's case, between buyers and sellers). There was a time when dozens of companies vied to be the auction site for the world. All have fallen by the wayside except eBay, which just made any challenge futile by buying online-payment processor PayPal. Whitman simply outsmarted everyone by moving aggressively to gain a critical mass of buyers and sellers, thanks in large part to the site's ease of use. Now she's raising fees, a privilege that naturally accrues to this auction monopoly. EBay could trade to $80 (it's now around $60) before it is so outrageously overvalued as to attract mutual-fund sellers.
We all should have known that Barry Diller had something up his sleeve when he sold those entertainment assets to Vivendi and decided to focus on the Net. We all figured he was obsessed with doing something sexy in Hollywood -- but nope, he was busy doing something boring online: creating a worldwide company that takes a cut of millions of transactions involving travel, leisure, and entertainment. Boring but extremely profitable. In fact, USA Interactive, with tons of cash to make acquisitions, might become the most valuable of the quartet over the next five years.
Many of you may not even realize that you are doing business with Diller. But if you have used Hotels.com or Expedia, two dominant travel sites, you have been paying a nice vig to USA Interactive. The only laggard in Diller's stable is the Home Shopping Network. Look for Diller to unload Home Shopping, perhaps to Comcast, perhaps in return for cash or Comcast stock. USA, now at 25, could shoot back up to its 52-week high (33).
Yahoo's stunning comeback can't be explained by the leadership of Terry Semel, the chief executive officer who came out of the entertainment industry. It can be explained only by the remarkable implosion of America Online as an advertising vehicle. The arrogance of the AOL ad team was so legendary that many advertisers flocked to Yahoo, which had better technology to handle the newfangled ad formats anyway. Almost overnight, online advertising went from being so expensive as to be unworkable to being so cheap as to be a must, and the only site that's really benefiting is Yahoo.
The online behemoth has 93 million active users, up 35 percent year over year, which is the best growth I have found of any company on- or offline. Ever since Sue Decker, the fantastic media analyst at the old Donaldson, Lufkin & Jenrette, became the chief financial officer a few years ago, we have seen this company go from being some weird Internet playpen to being a highly disciplined, focused company that actually fires people if they don't show up for work. Quite a change! Yahoo could go to $20 -- it's now at $14 -- and still be cheap on 2004 earnings.
Given the carnage in the sector, and the attendant crushing of the stocks of so many companies that came public in the late nineties, this quartet can now pick and choose among the ruins to augment their stables of product. And all of these four companies are acquisitive in nature.
It's ironic, of course, that a sector that was so loved by analysts and the public is now entirely written off by virtually everyone in the investing public. That's why the stocks, even after their great quarters, have failed to react sufficiently to the good news. That disconnect won't last forever, as a whole new class of portfolio managers, untainted by the dot-com delirium, recognizes this quartet as the deserving survivors of that wacky era.
It's hard to believe that the shake-out could happen so fast, that this new technology could sort itself out so rapidly into four winners and literally thousands of losers.
But it's over; the winners have been declared. The four champs and their stocks will soon be recognized as the only way to play what was once thought to be the New Economy.