As I sat down to write this column, the virtual stock exchange floor bell had just rung, concluding Pixar’s first day of trading as a public company. The stock opened at a roaring US$46 per share (up 109 percent from the initial public offering price of $22), traded as high as $49.50, and landed at $39 by the end of the day. This price per share gives Pixar (510/236 4000) a whopping $1.5 billion market capitalization. It also leaves the company’s primary owner, Apple co-founder Steve Jobs, a net profit on paper of more than $1 billion. (Jobs has invested close to $60 million in Pixar over the last 10 years and retained 80 percent of the company’s stock after the IPO.) The 6.9 million share offering, led by Robertson Stephens & Co., traded 11.7 million shares throughout the day, making it the second most active IPO in Nasdaq history – right behind Wall Street darling Netscape Communications.
While this is great for Pixar, it leaves me puzzled. There is no rational reason a $5 million-a-year animation studio is worth $1.5 billion. Yes, timing Pixar’s IPO on the heels of the premiere of its blockbuster movie, Toy Story, was brilliant. And, yes, there will be CD-ROM titles to make and character licensing agreements to sign. And, yes, Pixar has signed a three-movie deal with Disney, the most powerful entertainment company in the world. But let’s face it, unlike Netscape, Pixar isn’t selling into a market that promises to reach $25 billion by 2000.
The method behind this madness, of course, is much bigger than Pixar, or even Netscape. Mark Douglass, vice president of Morgan Stanley in San Francisco, offers two reasons for the frothy conditions of the current IPO market. First, the Internet is blowing major gusts of wind into the sails of the technology industry. “Anticipation for the Internet and the World Wide Web remain very high in the market right now,” says Douglass. He also notes that many people are succumbing to the herd mentality. “There are a lot of private and corporate investors jumping into the technology market who have never traded stocks before, because they don’t want to be left out.” Other Wall Street analysts told me off the record that many growth-fund managers have been buying at the IPO, running stocks up, and later dumping them to boost their own results before the year’s end.
The key question for investors right now is when to sell. (Investors don’t want to be left holding stock when the market ultimately corrects itself or – even worse – takes a huge dive.) My answer? The sooner the better. When a market is as ridiculously hyped as this one, where tiny little companies are breaking trading-volume records, it’s only going to take one sharp prick of bad news to burst the bubble. Let me give you an example.
The most closely watched, overhyped stock right now is Netscape. My bet is that two major events before March 1 will cause the company’s stock to suffer a major hit. The first big challenge is Explorer, Microsoft’s entry into the Web browser market. Microsoft has agreed to license Sun’s Java and incorporate it with Explorer, boosting that browser’s chances for market acceptance. I asked Steve Jobs who he thought would win this war – he guessed Bill Gates and Microsoft. “I hate to say it, but they have a lot more resources, and they have a certain track record of succeeding at these kinds of things.”
Netscape wunderkind Marc Andreessen pointed out, however, that Netscape enjoys a big advantage right now, because it has close to 12 million customers already using Navigator. “The rules of the game have changed,” says Andreessen. “It used to be that to dominate, you had to control the software business. Today, you have to open up your work and contribute it to the industry.” But with Microsoft apparently adapting to this business model, it puts more pressure on Netscape to turn up the flame and remain a step ahead of the market.
The second major event for Netscape concerns the lockup period for Netscape’s board of directors and top executives, who collectively are sitting on top of slightly more than 22 million shares of the company’s stock. Those people will be able to unload their shares in mid-February, and while I strongly doubt these investors will be dumping all their shares, they will get rid of enough to cover their initial bets, plus show a pretty handsome profit. This action will undoubtedly drive Netscape’s stock down, and it may be just the thing to let the hot air out of an inflated technology market.
I’ll be going short this month on 2,500 Netscape shares so I can cash in on this inevitable downturn.
A sharp drop in Netscape could very easily turn the entire technology market back upon itself. Netscape and Pixar aren’t the only tech companies whose stock may be dangerously inflated. While some might like to think this indicates investors’ willingness to invest in the future of promising companies, the truth is, it’s a crapshoot. People want to buy a gold mine cheap, without getting their hands dirty doing any of the digging. When it turns out that everyone who bought a share of Netscape at $75 now owns a piece of a very expensive hole in the ground, there are going to be a lot of aggressive fund managers out there wondering just where their profits went.
The Wired Interactive Technology Fund
Company | Primary Business | Symbol | Shares | Price Dec 1 | Since Nov<2 | Action
Mobile Telecommunications Technologies Corp. | Mobile computing | MTEL | 9,700 | 22 3/8 | – 6 1/4 | hold
Netcom Online Communications Service Inc. | Internet provider | NETC | 15,000 | 70 | + 6 1/2 | hold short
Global Village Communications Inc. | Communications hw/sw | GVIL | 3,800 | 24 1/8 | + 7 1/4 | hold
General Magic Inc. | PDA sw | GMGC | 4,500 | 13 1/8 | – 3/8 | hold short
Sun Microsystems Inc. | Hw/sw | SUNW | 7,300 | 84 3/8 | + 8 | hold
3Com Corporation | Networking | COMS | 3,800 | 42 3/4 | – 5<1/4 | hold
LSI Logic Corporation | Semiconductors | LSI | 7,800 | 40 1/2 | – 5<1/2 | hold
Applied Materials Inc. | Semiconductor equip. | AMAT | 4,000 | 47 | – 2 3/8 | hold
The Walt Disney Company | Entertainment | DIS | 1,500 | 61 1/4 | + 3<1/2 | hold
Apple Computer Inc. | Hw/sw | AAPL | 4,800 | 37 5/8 | + 1 | hold
New Stocks | | | | | |
Netscape Communications, Inc. | Internet sw | NSCP | 2,500 | 137 1/4 | | short
Portfolio Value | $1,219,868.75 | (+21.99% overall) | | | – 9.82%
Legend: This fund started with US$1 million on December 1, 1994. We are trading on a monthly basis, so profits and losses will be reflected monthly, with profits reinvested in the fund or in new stocks.
Information provided here is based on a combination of insights and gossip overheard cruising around the Goldman Sachs conference in New York, hanging out at the Hollywood premiere of To Die For, and listening to William Buckley and William Hearst III banter at the Herbst Theater in San Francisco.
The TWIT$ fund is a model established by Wired, not an official traded portfolio. Wired readers who use this information for investment decisions do so at their own risk.
Anthony B. Perkins (tony@herring.com) is editor and publisher of The Red Herring (http://www.redherring.com/), a monthly investment magazine.
