What sector has been glamorized more in the past decade than the Internet sector? Here, you’ll find both truly fabulous rewards and hair raising risks. For some serious rewards, you have to look no further than two current icons of the Internet: Google and Ebay.
Google began publicly trading its stock in August of 2004 at a price just below $100 per share. Currently, Google is trading around $565 per share; not a bad three year return! Take a look at Ebay. Ebay began trading in September of 1998 for $1.88 per share (not really, but that is the equivalent price when you take into account splits and dividends over the years) and is currently trading around $39 per share. That amounts to a nine year return of around 1,900%!
Of course, there are risks. You might have invested in one of these three notable Internet flops:
1. Webvan: Online grocer who had a great idea, but failed to take into account that there really isn’t a huge profit in grocery. They burned through hundreds of millions in investor’s money and went out of business in two years.
2. Pets.com: Online pet store. You may remember the famous pets.com sock puppet. This company went out of business in two years. Customers didn’t want to pay extra to ship often heavy pet supplies (i.e. bird seed, kitty litter) to their house when they could buy them at the local pet shop.
3. Flooz.com: This company lasted two years and failed attempting to create an online currency. It took $35 million of investor’s money with it.
Here are five ways to keep away from the Floozes and find the Googles:
1. Avoid buying high and selling low. This tip works not only for Internet stocks, but also any type of investment. Typically, people follow a hot stock for months and then jump in, only to see the stock go down the next day. Panic ensues and the person sells only to see the stock rebound and perhaps go higher. Don’t time the market; if you picked a strong stock you should be in it for the long term; don’t pay attention to its day to day movements or you’ll get spooked and sell too soon.
2. Invest in what you know. If you don’t understand the company’s business model, it will be extra risky for you to invest in that particular company. You need to understand the market, the strength of the competition and the strength of the company in question.
3. Consider traditional metrics, such as Earnings/Share (EPS), profit margin and P/E ratios, but, to get a clearer picture, compare them with competitor’s numbers. For example, Ebay’s EPS is currently .988 and its P/E is 37.2. Amazon.com’s EPS is currently .73 and its P/E is 120. Now, as part of your analysis, you can determine that Ebay seems a bit undervalued compared with Amazon; investors are paying more for Amazon’s lower earnings. But, there might be a good reason for Amazon’s investor optimism, such as expansion into different countries, or offering different product lines (Amazon just opened an online music store).
4. Get geeky. Keep current with cutting edge technology because this drives Internet stocks. The next Google, Ebay, Amazon, Cisco, or Microsoft IS out there right now. If you can uncover disruptive (read: technology that will change everything when its adopted) technologies and invest in companies who are leaders in those technologies, you could stand to make huge future gains.
5. Be wary of chat room tips. A lot of people read posts on blogs and chat rooms and act on “tips” they receive here. Be extremely wary! Just remember the next time you see “DUMP GOOG! CRASH COMING!” Look on a more established website if you think there could be anything to this “tip.” More likely than not, there isn’t.
Good luck and happy trading!