Net Stocks Promise The World, But Not Much Profit
Eric Ellis San Francisco

12/07/1998
It may well be, to quote Silicon Valley's Mr Venture Capital, John Doerr, the "greatest legal wealth creation in history" but more and more US broking houses feel that some of that wealth may be looking a bit shaky.
The past week has seen a spate of brokerages ask their private clients to stump up more cash to support accounts top-heavy with booming internet-related stocks.

Leading traders Salomon Smith Barney and Charles Schwab have both advised their clients they are raising the levels required to allow margin-trading for accounts laden with volatile internet stocks.
San Francisco-based Schwab, a leader in the online trading popular with small private investors, said it was raising the bar on 22 internet-related stocks to 50 per cent from 35 per cent.

"The 50 per cent maintenance requirement will apply to those accounts with highly concentrated positions in internet stocks," the company said.

That's because the internet sector is re-writing the traditional rules on how to evaluate corporate worth, in large part because few of the hot companies in the sector actually turn a profit.

Indeed, a new form of analysis has emerged to rationalise the "blue-sky" values of stocks like Yahoo, Amazon and E-Bay, which boast capitalisations of $US5-15 billion but as yet precious little profit.

Where the time-honoured "price-earnings ratio" is traditionally applied by analysts to assess a stock, a sector or a market's worth, some internet companies are now being assessed with revenue-earnings ratios.

That's because the bigger a company gets in sales terms, the less short-term profit potential it has while the market assesses just how big the internet and online commerce can become.

The booming stock prices are being propelled by an explosion in online trading.

The message from Schwab and Salomon is a warning shot to the so-called "mums and dads" who are powering the sector.

Unlike the Dow Jones Industrial Average constituent stocks and the major US public companies, which have an institutional shareholder base of 70-80 per cent of the issues stock, the same institutions have tended to shun internet stocks until the market shakes itself out.

The search engine company Yahoo has the highest institutional interest, some 28-30 per cent of its register, while others can barely boast 10 per cent.

The surge in the internet sector has coincided with a surge in online broking, where anyone with a computer, a modem and a credit history can open an online account and trade shares, usually at big discounts to the more traditional "full service" brokers.

The wild price swings of internet stocks has caused brokers to seek higher cash-to-margin ratios in online accounts.

It is not unusual for some stocks to triple and quadruple in a day, often simply because the company has launched an internet page, or announced it will sell product via a dedicated web site.

Ameritrade, DLJ Direct and the US Clearing Corp, which clears trades for 350 firms, have all raised margin on some net stocks to as high as 65 per cent from the 35 per cent norm. Popular online trader E-Trade is also expected to raise margin levels.