AOL, Yahoo, Amazon, Lycos, Excite, eBay, CNet, CMGI, E*Trade, etc, etc, etc.
Over the past 2 years, companies built around the explosive growth of the Internet have been treated to surges of retail (and lately institutional) buying that are out of this world. Web sites which those of us who surfed in 1994 remember as promising have billions of dollars in market capitalization standing behind them, sometimes tens of billions.
There are at least 100 Internet-related issues trading (mostly on Nasdaq markets) today. When markets are doing well, demand for the most reputable issues (like those I mentioned) is essentially unlimited at any price. There is no reason to prefer Amazon at $100 rather than $200. Traders are buying because they think it will go up.
Well, it has. I sure wish I had poured some of my savings into AOL or eBay, since they command 4-digit earnings multiples these days. I didn't do it because I was fairly new to investing at that point, and the risks involved seemed immense to me.
But these days I can hardly avoid reading about them. When Net stocks start off on the wrong foot, they can drag my more legitimate (if still priced for real growth) Nasdaq issues towards the ground with them. They have a pull on the markets, so I have to pay attention.
I like to look at these issues as call options on the bright future the Internet apparently has. We all envision that Websites will continue to change the world, and it's still true that there's a huge amount of growth potential left in electronic commerce. Unfortunately, investors trying to predict the eventual winners are likely to be left empty-handed.
Why spend time waiting for a company to "grow into its valuation" (as bullish Internet analysts predict) when you can find companies with proven earnings growth and strong potential to improve today?
One reason is that the stocks have a lot of momentum behind them and stand a decent chance of going up. (This typically happens without any real change in earnings potential of the underlying firm...) Last year's Internet sector returns were not to be missed, and the first quarter wasn't so bad either. An investor who depends on the speculative foolishness of other investors might try to profit from a small stake in an internet-related mutual fund. I would avoid committing more than 5-10% of holdings to these issues.
I think the most rational thing for an investor to do, though, is to look for issues that have a real chance to benefit from Internet technologies and keep their money there. As long as the market continues to put a premium on this growth, Cisco, Lucent, 3Com, and other networkers have great potential. I'd look for bargains among promising newcomers... though there aren't many out there that haven't been inflated beyond comprehension. I still have trouble paying a P/E of 120 for Cisco or Lucent, but I'm long Lucent because recent good news hasn't had a chance to move the stock into the 60s.
Additionally, there are plenty of companies in traditional industries that have e-commerce strategies. While many of them are dimly viewed by investors because they are not 'pure plays', plenty of companies will be able to make significant cost reductions by using the 'Net whether investors currently like it or not. For example, Dell makes almost a third of its sales online now. It's much, much cheaper for them to have that website than to hire hundreds of extra phone operators! I'm long DELL because I think rumors of the death of profits in the PC industry are greatly exaggerated.