The Nation’s Business

Illusion or reality, the Web leads the way

Peter C. Newman March 15 1999
The Nation’s Business

Illusion or reality, the Web leads the way

Peter C. Newman March 15 1999

Illusion or reality, the Web leads the way

Peter C. Newman

The Nation’s Business

Not since Bre-X was Bay Street’s darling and wildeyed analysts swore on stacks of stock certificates that the company’s Indonesian claims were solid gold peppered with gold (instead of pure mud salted with gold) has there been a stock market mania like this.

This week, a syndicate of four brokerage houses—Yorkton Securities Inc., CIBC Wood Gundy Securities Inc., Merrill Lynch Canada Inc., and RBC Dominion Securities Inc.—is sponsoring a $40-million stock issue for Versus Technologies Inc. Versus Technologies, which also acts as an institutional brokerage firm, has been one of the most eagerly anticipated initial public offerings (IPOs) in Canadian history, and could be the most profitable for those investors fortunate enough to grab some shares at first-day trading levels. The fledgling Toronto-based company has one main asset: an exclusive licence for Canada from E*Trade Group Inc. of Palo Alto, Calif., which went public in 1996 as a tiny—$317 million (U.S.)—online electronic brokerage service. During 1998, its stock fluctuated between $5 and $66; its market capitalization has reached as much as $7.6 billion.

One of this country’s largest companies,

BCE Inc., joined the e-commerce game in earnest last summer when it folded Impact Media Corp. into the newly established BCE Emergis Inc. The new firm has more than quadrupled its market valuation since. (Another mega-successful high-tech issue that closed last week was Gerry Schwartz’s offering of eight million shares of Celestica Inc.)

All this is happening against a background of unprecedented slaughter of Canada’s traditional sectors, such as retail, mining and oilpatch stocks. (Remington Energy Ltd., which was trading at $34.50 only 18 months ago, recently sold at $1.51 a share.) One-time Canadian stalwarts such as Hudson’s Bay Co., the T. Eaton Co. Ltd., and Calgary’s Big Bear Exploration Ltd. are headed for the cellar, already inhabited by such former high-flyers as Livent Inc., Philip Services Corp., Royal Oak Mines Inc., and the Loewen Group Inc., the funeral-home company that ironically has reached a stage of solvency inadequate to finance its own funeral.

Meanwhile, values of Internet stocks, especially on the U.S. market, are setting records unrivalled by any other medium. As one stock analyst has pointed out, when radio was introduced to Wall Street in 1922, it took several decades to build up a listener base large enough to make its stocks worthwhile investments. Television, developed in the late 1940s, required 14 years to reach a similar level of maturity. The Internet has been a factor for barely five years, yet it has already dramatically exceeded the stock records of its predecessors. Of Wall Street’s 15 best performing IPOs of all

The Himalayan multiples of today’s Internet-related stocks reflect neither present earnings nor future prospects

time, 14 are Internetor networking-related. The biggest first-day jump was electronic gateway Theglobe.com’s 606-per-cent increase to $63.50 from its issue price of $9 last December. Yahoo! Inc., one of the more popular Internet portals, has gone straight up, reaching a market valuation of $31.6 billion, though its total 1998 revenues were only $203 million. That means it is trading at 150 times sales!

In Canada, the leading trader by value for the first quarter of this year has been Bid.Com, which was issued at $1.75 a share in November, 1998. During its first 100 trading days, the stock climbed to $9.90.

The explanation for all this craziness is that it’s no longer the leading-edge stocks that dominate the market. They were the first and the best in their categories. Now, there’s been a new term coined—bleeding-edge—which applies to companies and stocks that are way ahead of their time. The Paris-based Organization for Economic Co-operation and Development has predicted that within the next 60 months at least 15 per cent of global retail sales will be transacted using the Internet. Most experts who have analyzed that forecast are convinced that it is far too conservative. They believe that as much as half of everything we buy and sell will eventually move over the Internet.

The problem with the astronomical prices being paid by investors to become part of the Internet revolution is that there is nothing comparable to judge them against. The Himalayan multiples of today’s stock market reflect neither present earnings nor future prospects, but the esoteric nature of the investment. It’s the category with the buzz. Actual value has no place in those fanciful equations. Investors want to be part of the Internet play, no matter what the price. Once shares in a company reach levels that are totally disconnected to their values, according to any sane measure, stocks are simply worth what they trade at.

What is significant in all this is that capital markets, no matter how bizarre, usually indicate the direction in which economies are heading. Oilpatch and traditional retailers’ stocks may be under water, and yet the stock market has never reached similar heights. Smart investors won’t try to fight this overwhelmingly obvious global trend. There is no point pretending that Canada can somehow opt out of the industry that will dominate the new millennium.

The Internet, which is still growing at 100 per cent a month and will boast one billion Web sites by year’s end, will be the dominant reality of the 21st century.

Oh, and by the way, it will be Quebec separatism’s agent of destruction. A medium that uses mostly English in its international transmissions, with most of its futuristic programs available only in English, will tame the fires of Quebec nationalism.

Now, there’s a good reason to pour more money into Internet stocks, no matter how high they go.