Internet retail is in a frenzy, but will the bubble burst?
A WEB OF GOLD
Internet retail is in a frenzy, but will the bubble burst?
On the morning of Wednesday, Dec. 30, 46-year-old Jack Berkovits did what he usually does when he is vacationing at his condominium in Miami Beach, Fla.
He turned on the television to glance at the cable news network CNBC, then settled back in his chair. At the bottom of the television screen, CNBC was flashing an electronic ticker tape noting stock prices. Berkovits saw the stock symbols UBID (uBid Online Auction) and YHOO (Yahoo Inc.) flicker by, then he saw DGJLF, the NASDAQ symbol for his own Toronto-based company, D. G. Jewellery of Canada, Ltd. “It was showing 7 V2,” Berkovits recalls. “I thought there must be a mistake.” Earlier in the week, D.G.’s shares had been trading at $3.50 (U.S.) and Berkovits couldn’t figure it out. “So I picked up my phone to dial my voice mail. There were 20 messages.” Most of them were from U.S. investment brokers thanking him for making money for their clients. “I sat there stunned, absolutely stunned,” he says.
By 10 a.m., D. G. Jewellery had flown to $9.50 and Berkovits’ own
broker began to get caught up in the enthusiasm, believing the stock could hit $25. The reason for all the delirium about a hitherto unknown jewelry manufacturer and wholesaler? D.G. had just announced that it would market its rings, bracelets and necklaces over the Internet. The shares were then swept up in the euphoric trading of stocks of companies selling goods and services on the Web, a craze that has gripped U.S. financial markets since the late fall. Berkovits had no idea when his company issued the news release at 8 that morning what the impact would be. “I thought the reaction was insane,” he now says. “I’ve issued other press releases about my company that should have taken the stock to $20, but there was never even a blip. This time, all I did was say we were going on the Internet” He pauses, chuckles, then adds facetiously: “I’m looking now to make more Internet-related announcements no matter how unimportant they are.”
It does seem that anything smacking of the Internet can drive investors wild. Shares of companies that no one ever heard of before have doubled or even tripled in value; companies such as Bikers Dream Inc., a Riverside, Calif., outfit that is selling motorcycle parts on the Internet, saw its stock jump 167 per cent to $6.84 on Dec. 29. After SkyMall Inc. of Phoenix, which sells in-flight merchandise through catalogues and on the Web, announced online sales during the Christmas period would be $1 million, its shares shot up $23 to $35. The frenzy for the stocks of firms on the Internet is so great that it seems all a U.S. company needs to do to sell shares is to set up a Web page. “It’s the .com syndrome,” says Toronto Internet consultant Rick Broadhead. “Just add .com to your press release and you’re likely to do well with your initial public offering.”
Shares of other, well-known Internet-related companies such as the virtual bookstore, Amazon.com Inc. of Seattle, the online flea market eBay and the Internet service provider America Online Inc. of Dulles, Va., have blasted through the stratosphere. The capitalization of AOL is about $70.8 billion (U.S.)—far greater than that of Walt Disney Co.’s valuation of $62.5 billion. In late December, Charles Schwab Corp. of San Francisco, a discount broker that does a lot of business online, pushed ahead of Wall Street stalwart Merrill Lynch in terms of capitalization. And the value of all the shares outstanding in Amazon.com, founded in 1995, is $30 billion, double the capitalization of one of Canada’s oldest banks, CIBC. Shareholders who bought Amazon stock early last year must be rubbing their hands with glee: the share price has risen more than 900 per cent even though the company—which reported Christmas revenues of $250 million—has yet to turn a profit.
Canadian companies, other than D. G. Jewellery, have logged onto the Internet frenzy, too, including mutual fund company Altamira Investment Services Inc., which just launched Altamira E-Business Fund to invest in e-commerce
stocks, and the Royal Bank, which has just bought a small U.S. Internet stockbroker, Bull & Bear Securities of New York City. Perhaps the best example of the extent of Internet fever could be found in news last week that a Luxembourgbased company operating a Web site called Jesus2000.com plans to go public. The company, Venture Capital Technology Organizations Holdings AG, figures it can convert the online sales of religious merchandise into meaningful profits.
Some market watchers wonder when the stock mania will subside. “I don’t think it can continue indefinitely, but when it will stop is anyone’s guess,” said Broadhead. The true skeptics make comparisons to the Dutch tulip bulb craze in the 1640s, when Netherlanders’ passion for the then-exotic bulb pushed prices to ridiculous highs before the market crashed. Others point to contemporary examples, including K-Tel International Inc. of Minneapolis. Investors swooned over K-Tel after it announced in early December it would sell music over the Net, but two weeks later, NASDAQ threatened to delist it because the company did not have adequate assets.
“It’s a very dangerous time in the stock market,” cautions John Tillquist, a specialist in e-commerce who teaches business at the University of British Columbia in Vancouver. ‘We’re seeing stocks that are way overvalued and based on pure speculation.” Jim Carroll, who co-authored the Canadian Internet Handbook, argues the e-commerce stock fad “defies all logic. I’m concerned that within the year there will be a major crash of Internet stocks and that will lead to a significant sell-off.”
There are signs that rationalism is seeping into the market. Prices of some stocks have already come down. Charles Schwab shares fell last week by almost four per cent when the market decided that valuations of it and other online brokers were over the top.
Still, appetites continue to be fed by the Web’s expansion as a mass retail market, a phenomenon now known as “e-tailing”. James McQuivey of Cambridge, Mass.-based Forrester Research says U.S. Christmas sales over the Net were $3.5 billion, and 2.2 million American households shopped the Web for the first time during the fourth quarter of 1998. “Internet commerce has tripled this year,” he says. “There is no other industry that can say that. This is a big deal and it will continue to grow.” He figures e-commerce will amount to more than $100 billion (U.S.) by the year 2003. David Pecaut, senior vice-president and head of e-commerce practice at Boston Consulting Group, says a study by his firm and shop.org, a trade association for online retailers, shows revenues of Web retailers were more than $13 billion in 1998 and are growing in North America by 200 per cent each year. The big winners: travel, computer goods and entertainment.
In the United States, AOL reported Christmas sales of $1.2 billion were made over its Internet service. But the phenomenon has not yet taken hold in Canada. “The market is not as mature in Canada as it is in the United States,” notes Stephen Bartkiw, managing director of AOL Canada. Only 13 per cent of Canadian households—1.5-million homes—are online, compared with 25 per cent of U.S. households. And while companies such as Zeller’s and Canadian Tire operate Web sites, there are few Canadian sites that offer the same ease of shopping as American ones. “In Canada, we’ve been slow in making attractive Internet offerings,” says Pecaut. ‘We are really very backward on our e-commerce sites and it is going to be hard to catch up.” Pecaut cites the case of book retailer Barnes & Noble. It spent millions trying to catch up to Amazon but it is still running behind. That is a cautionary tale for Canadian retailers. If the selections and features on the U.S. sites are better, Canadians are already demonstrating that they will go there. Amazon.com is already one of the biggest booksellers in Canada.
The same goes for stock market plays. The Internet frenzy is playing out on U.S. exchanges, not Canadian ones. For instance, Bid.Com International Inc., a Toronto-based online auction house listed on the Toronto Stock Exchange, has not seen anywhere near the wild price appreciations of companies such as D. G. Jewellery that listed on NASDAQ, despite the fact its sales have grown from $32 million (Cdn.) in 1997 to $60 million by the third quarter of 1998. Last Wednesday, shares of Bid.Com (in which Rogers Communications Inc., the owner of Maclean’s, is a minority shareholder) rose 69 cents to $5.25 (Cdn.). But the 15per-cent increase pales against the dizzying rise of its U.S. competitor eBay, which shot up 22 per cent to $285 (U.S.) the same day. Compared with his NASDAQ competitors, Bid.Com’s president Jeff Lymburner allows that his company is probably viewed as undercapitalized. “Being the only e-commerce player on the TSE, it has taken us a little longer to develop a following. The visibility of NASDAQ is very, very many times greater than the TSE.” Lymburner concludes: “NASDAQ is probably where we should be.”
Jack Berkovits is certainly glad his company listed on the Boston Stock Exchange and NASDAQ, rather than the TSE—the company never had this much attention in its 30-year history. After its $9.50 high, the stock closed the same day at a reasonable $5.50, a level Berkovits is happy with. The idea to set up a Web site had been his sons’: 25-year-old Ben, who works as an account manager for D.G., and 23-year-old Dan, who recently left his job as a ScotiaMcLeod investment banker to help D.G. go online. They believed the family business—which sold $57 million worth of jewelry last year, mostly in the United States—needed to keep up with the times. “The two were telling their old man he was useless because he wasn’t on the Internet,” jokes Berkovits Sr. Now, with all the hoopla, Ben and Dan say they want a raise. Jack Berkovits will probably give in. Getting into e-commerce, he concedes, is one of the best things that ever happened to his company.
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