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The Internet Bubble Monitor

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March 9, 2001
This is the last entry in the Internet Bubble Monitor. At what point do you say that the Internet Bubble is over? It's not like a war, where one side surrenders. I'm satisfied that there is no more need to assault the bubble.

Speaking of the war metaphor, I like to compare my stance on the Bubble to Churchill's warnings about Hitler. Like Churchill, I was not alone, but for a while I was outnumbered. Fortunately, the Bubble did not wage wars or put people into concentration camps. So I don't see myself as any great historical figure.

I first wrote about Internet stocks in August of 1995, when Netscape went public. The day before the IPO, I predicted that the price would soar. The day after the IPO, I predicted that Wall Street soon would tire of Internet stocks. The first prediction was very accurate, but the second prediction was at best premature.

I picked up the story again in the summer of 1999, when I wrote Arithmetic in a Bubble. I launched the Internet Bubble Monitor at the end of that year. The five stocks that I included--Yahoo, Proxicom,,, and Microstrategy--all lost over 90 percent of their value from then until now.

Well before the market peaked in March of 2000, I suggested to author Gary Rivlin that he do a book on the Internet Bubble, with an eye toward demythologizing venture capitalists, who then were riding high. The title I proposed was, "Fools and Greater Fools." Rivlin passed on the idea, but that would-be title summarizes my view of the history of the Internet Bubble.

NOTE: Scroll down for the Internet Bubble Monitor Calculator

Thursday, March 08, 2001

You know things are bad when. . .

Somebody starts a fundraising chain letter for Internet stocks.
Some mistakes have been made. But this budding industry still needs your support. Remember your positive Internet experiences then, on April 3, buy 10 shares in a company you admire. Your participation will send a signal to Wall Street that Netizens will not abandon their favorite medium.
Really tugs at your heartstrings, doesn't it? Sends you running for a tissue--or an airsick bag.
posted by Arnold Kling 3/8/2001 12:46:02 PM

Much Bally(A)hooed

Much Bally(A)hooed ...

Lowering the estimates for Yahoo was not unexpected. We have always been skeptical of the online advertising business model. What bothers me now is why Yahoo is embarking on a $500 million stock buyback.

Stock buybacks serve no purpose other than to try and bolster the stock price, much like the Federal Reserve intervening to support the Dollar. If Yahoo can find no better use for $500 million, why don't they simply declare a one time dividend?

More importantly, I am alarmed that Yahoo can find no better use for $500 million out of its cash flow than to buy back its own stock. It shakes my (admittedly weak) faith in Yahoo's top management's strategic abilities. A more sinister explanation is that a stock buyback (and the resulting rise in stock prices) is the easiest way for a management heavily vested in cheap options to reward itself without appearing to do so.

I agree with Prof Kling's comments that the analystouts ought to have their heads examined. But when Yahoo's stock was trading at $240, why did 'TK' not come out and say that the price is based on unreasonable growth expectations? I would feel for him if he had publicly agreed with Arithmetic in a Bubble

posted by Suresh Krishnamoorthy 3/8/2001 08:58:27 AM

Wednesday, March 07, 2001

Et tu, TK?

The Big News of the day was that Tim Koogle is stepping down as CEO of Yahoo. In the good old days, he was known fondly by the analysts as "TK." My personal view of Yahoo is that management has done more with the company than I ever would have expected. This is a case where if they did not meet expectations, then the analysts and touts who set those expectations are the ones who ought to be fired.
posted by Arnold Kling 3/7/2001 02:35:13 PM

Monday, March 05, 2001

Today's Biggest Loser

As of 3 PM EST today, WEBM was the market's biggest loser, as this story indicates. I give the analyst credit (a) for downgrading the stock before it had fallen below 20 (usually they wait until it's completely dead before issuing a negative signal) and (b) noticing that if companies are going to reduce investment, then these types of IT service firms are going to get hit.
posted by Arnold Kling 3/5/2001 11:50:14 AM

Saturday, March 03, 2001

Running out of Bubbles?

On Friday, Corvis closed below 10. So far, none of the bubble stocks has recovered from going below 10. Some institutions automatically will not hold stocks that fall below that level. MicroStrategy has been below 10 for a while now. Both CORV and MSTR may have to be dropped from the Bubble Monitor if things don't pick up soon. But who can we get to replace them? Are there any more good bubbles out there?
posted by Arnold Kling 3/3/2001 11:16:41 AM

Thursday, March 01, 2001

And Speaking of Copyright Infringement

And Speaking of Copyright...

I suppose that MicroStrategy is contemplating action against Gateway for copyright infringement, based on this article

Wall Street's relentless and short-sighted focus on the short term has pressured companies to literally cook the books for quarterly reports. The accepted pattern seems to be to come out with earnings close to projections and then revise them a quarter or two later and hope that nobody notices or cares.

posted by Suresh Krishnamoorthy 3/1/2001 08:05:04 AM

Wednesday, February 28, 2001

Intellectual Property at MSTR

The Washington Post reports that MicroStrategy is attempting (unsuccessfully, thus far) to block Motorola from using the slogan "Intelligence Everywhere." MSTR claims that this would infringe on their trademark to that phrase. In addition, they are threatening to sue anyone who tries to use the phrase, "We are revising our financial statements," because that also infringes on a company trademark.
posted by Arnold Kling 2/28/2001 11:30:46 AM

Editor's Note: The following post, from Suresh, mentions Henry Blodgett. I want to again thank Blodgett for recommending Openwave, which has been a fun stock to have on the Bubble Monitor--very volatile, mostly down.

A Cautionary Tale

We have argued vehemently that Analysts have contributed significantly to the despair that has engulfed ordinary inverstors in the bubble collapse. Here is a telling extract from a Wall Street Journal Article, written in December 1999:

No one on The Street knows whether Merrill fired Jonathan Cohen--who, around the time Blodget made his famous call (12/98), said Amazon was overvalued at $240 and gave it a $50 target--in order to make room for his younger rival. But it sure looks that way. "Merrill got egg on their face, and Jonathan was the reason," says one industry player. "Hiring Blodget made them look smart."

More bluntly, even if Cohen used the most rational, time-honoured techniques to arrive at his 1998 sell recommendation on Amazon, he was wrong. The stock did climb, and trades nowhere near his target (before the stock split) of $50. "You can only be wrong for so long before you are out of a job," Keirstead says.

For better or worse, the game is a short-term one. "Wall Street isn't a place where being accurate two years down the road is highly rewarded," says Hooke. "The key is to generate the commissions from investment banking right now. Let the institutions that buy these securities worry about two years down the road."

So, the next time you are tempted to buy a stock based on the optimistic projection of Mary Meeker or Henry Blodgett (who finally rated Amazon as something other than a Strong Buy in January of 2001), remember the $4 million annual salary you helped pay Henry Blodgett. Jonathan Cohen sure looks like a genius now, but he was the one who got canned.

Henry Blodgett, by the way, is still going strong and at age 33, is regarded as an 'expert' on the Internet.

posted by Suresh Krishnamoorthy 2/28/2001 09:28:34 AM

Tuesday, February 27, 2001

Pressure on Analysts

The latest Industry Standard has a fascinating article on Ravi Suria, the Lehman analyst who took down Amazon. My favorite line in the story:
According to a report in the New York Observer, John Doerr, an Amazon board member and an influential partner at Kleiner Perkins Caufield & Byers, called top Lehman executives in a bid to quash or tone down Suria's latest report before it was published. . .

posted by Arnold Kling 2/27/2001 01:16:01 PM

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The Internet Bubble Monitor Calculator

by Arnold Kling

To update, enter current values for stock prices, and click the "calculate" button. Or, you can use the default values. Scroll up to the most recent message to see when the default values last were updated. See notes below.

CompanySymbolPriceMarket Cap
($ Mill)
Key RatioDescription of Key Ratio
YahooYHOOpage views per day per human being on earth
CorvisCORVmarket cap ($ billion) per number of mentions in Gilder's Telecosm
WEBMmarket cap to sales
OpenWaveOPWVprice-to-sales ratio divided by Worldcom's
MSTRpercent of Fortune 500 that has to pay $50 million for data mining
The total market cap for these five companies, in millions, is
  1. Yahoo's key ratio is the required number of page views per day per individual on the planet needed to justify its market cap. As of 12-27-99, this value was 11, meaning that everyone, regardless of age, language, or Internet access, needs to view 11 pages on Yahoo per day. See Arithmetic in a Bubble. This reflected their then-current revenues of $4.70 per thousand page views. As of July 12, 2000, we reset this to $4.30 per thousand page views, to reflect recent performance.

  2. On October 23, 2000, Corvis replaced Engage Technologies, which in late February had replaced Koop. Corvis' key ratio is their market cap in billions divided by two, which is the number of times they are listed in the index of George Gilder's book Telecosm. Gilder's imprimatur is the main source of value for some of the "bandwidth and infrastructure plays."

  3. On Feb. 12, Y2K, WebMethods replaced MusicMaker, because MusicMaker appeared to be dying. WebMethods' key ratio is its market cap to annualized sales. In WebMethods in WebMadness I suggest that a reasonable price-sales ratio in this industry might be 7.

  4. On February 2, 2001, OpenWave replaced Proxicom. Worldcom's price-sales ratio is about 1.6. OpenWave's key ratio is its price-sales ratio divided by 1.6.

  5. MicroStrategy sells a "data mining" product to Fortune 500 companies. Let's assume that the price is $50 million per company. What percent of the Fortune 500 need to pay this price in order to justify MicroStrategy's market cap? We assume that MicroStrategy's production costs are zero, since what it is selling is smoke and mirrors. As of 12-27-99, MicroStrategy "only" needed about 25 percent of the Fortune 500 to pay it $50 million in order to equal its market cap.

  6. As of February 12, Y2K, the total market cap of the five companies was 112704, or $112.7 billion. Coincidentally, on Feb. 29 when we substituted Engage for Koop, the market value also came to about $112 billion. I feel quite confident that this is at least 100 times their true value.