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The most speculative sector of them all

Today's Financial News - Posted May 29, 2009

The Internet industry is filled with “sleeper” speculation. Fall asleep at the wheel and the hidden dangers will catch you and hammer your portfolio. Pay attention and you can make some money.

By Andrew Snyder, TodaysFinancialNews.com

Baltimore – (TFN): Most analysts and investors are not talking about it, but this has been a huge week for the online world. While no major revelations were made, there was enough moving and shaking to further weaken an industry’s already unstable foundation.

Investors need to pay attention.

Probably the most eyebrow-raising nugget of news is out of Facebook. When a Russian company plopped $200 million on the table for a 2% share of the company, the valuation hype started to fly. The latest deal, gives the popular Web site a valuation of $10 billion.

But in 2007, when Microsoft (NASDAQ:MSFT) paid $40 million more for a smaller, 1.6% stake, the deal gave Facebook a value of $15 billion.

Did Microsoft over pay or did Russia get a deal?

Who cares?

Frankly, both figures grossly overvalue the company and its future growth potential. About the only thing the figures got right is they have the trend moving in the right direction… downhill.

If investors have not learned young Internet users are the ficklest of them all, they never will. The Web’s propensity to build up a popular site and knock it down just as quickly is what makes valuing assets so tricky.

Here today, gone tomorrow

The Web may be the most volatile and speculative sector out there.

Need proof, just ask the couple of guys in charge of Twitter. One week Biz Stone and Jack Dorsey were buying a domain name, the next they were watching as their 200 millionth user logged on, and the next week they were left wondering where everybody went.

It may be an exaggeration, but if you have followed the words of the company’s leaders, the notion is not too far off.

Earlier this week, Twitter tripped up the sector’s high-flying status when its founders said they had no idea what Twitter’s business model was… or will be. In other words, they have no idea how to ever create a profit.

Sounds like 1999 all over again. Pets.com anybody?

And then there is the company stuck in the media world’s version of no-man’s land, TiVo (NASDAQ:TIVO). Unable to compete with online offerings like Hulu (which NBC swears will be profitably real soon) and Netflix (NASDAQ:NFLX) or the in-house features offered by almost all cable and satellite providers, TiVo has done nothing for its investors but show them a real-life definition of opportunity cost.

While the markets have boomed over the last two months, TiVo investors are left yawning and asking what else is on.

How long can TiVo stand the pressure?

Finally, there is the ever-anticipated news that Time Warner (NYSE:TWX) is finally cutting ties with AOL.

The ship has been taking on water ever since it was announced in 2000. It took nearly a decade for the company to realize there was no way to clear the bilges of such nasty, stagnant water.

This week’s news should be all you need to be convinced of the ever-present danger in the Internet industry. Sure, sexy opportunities will come and go, but trying to pick the next Google (NASDAQ:GOOG) or Microsoft is nothing more than a gamble, without the free drinks and nightlife.

Valuations are falling and will continue to do so at an increasing pace. The trend will finally come to an end after a wave of consolidation. Once that happens, investors will have a shot at long-lasting, sustainable profits from a handful of the largest companies.

Fortunately, we already know who they are.


Next Article: Currency Investing: It is make or break time

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Posted by Andrew Snyder · Filed Under Featuring..., Investment Strategies 

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