Internet stocks orbit into unknown

There's a company, known as eBay which is based in Silicon Valley. The company is in the Internet auction business - if you've got an old computer, a spare desk, or one of the baseballs which home run record-setter Mark McGuire hit out of a ballpark last summer, you can put it up for auction over the Internet. If you are looking for a used computer, a desk, or a million dollar baseball, you can go to eBay, see what's on offer in thousands of categories, and place a bid.

Every day, about 140,000 items are added to eBay's offerings - recently, you could buy a used hearse, a sound card for a laptop computer, fake eyelashes, and over 1,000 different Elvis collectibles. A certain amount of trust in your fellow human beings is required to cut a deal on eBay, but in a warming show of the power of positive thinking, millions of people seem pleased enough to participate in this global flea market.

The way eBay makes money is by charging sellers a fee for putting an item up for sale, then taking a percentage from the price paid for an item. In the fourth quarter, eBay's revenues from listing fees and commissions just for those little stuffed toys called Beanie Babies was $880,000 (#762,367).

Last year, eBay, which has been around for just over three years, decided it was time to go public. As one of the only Internet companies to go public while also showing profits, its flotation was hotly anticipated.

Unsurprisingly, the stock rocketed on the first day of offering last autumn, but nonetheless, the numbers were stunning: shares, which debuted at $18, posted a 163 per cent gain on their first day. Since then, they've grown over 16 times their initial valuation.

Some comparative figures put those numbers in perspective. According to CIBC Oppenheimer, it took Microsoft stock 216 weeks for the stock to increase tenfold for shareholders. Yahoo stock did the same in 72 weeks. Astonishingly, it only took eBay stock 10 weeks for the same feat.

But is eBay really that valuable? Let's put it this way: it's getting more and more difficult to find analysts who do not think Internet stocks are ridiculously overvalued. As San Jose Mercury News investment columnist Adam Lashinsky noted recently: "eBay, at $12 billion in market capitalisation is worth 50 per cent more than Kmart Corp", the gigantic US discount store chain.

Why are shares so high? As with other Internet stocks, the answer is simple and complex: no one knows. Nothing like this has ever happened before in the stock market. There are no visible means of support for these shares, yet they continue to climb.

That is the case even though almost none of the other sizzling Net stocks are associated with companies which have ever in their short histories exhibited anything as exotic as revenue. For example, Amazon.com, the Web-based bookseller everyone's grandmother has heard of and which everyone cites as a shining example of e-commerce, has never shown a profit.

This week, Yahoo stock rose as much as £50 per share (#63.49) a day. Analysts here have begun to liken Net stock behaviour to the tulip mania which engulfed the Netherlands centuries ago, when single tulips could be worth a fortune because of their perceived value at a time of inexplicable flower hysteria.

Of course, some companies will eventually do very well indeed, and Amazon, one of the first in, will likely be one of them. But that still doesn't answer why Internet companies are - even in the opinion of those who work in or close to the industry - grossly overvalued.

Will they stay high? Many investment analysts think not. They point out that the major investors, and the ones who continue to pump money into Net shares, are not the insiders or the big investors anymore but average Joes and Janes. Indeed, one Silicon Valley analyst pointed out last week that the big investors and the best-informed industry investors, the ones who own thousands or tens of thousands of shares, have been cashing out at a startling pace since October.

CDA Investnet Technologies, a Maryland research company, tracks such things and reported that some 300 insiders - the large shareholders actually working within 24 major Net companies - have unloaded millions of shares in the past few months. Some insiders - in one case, a company CEO - have been so anxious to sell that they've forked out penalty payments of hundreds of thousands of dollars in order to sell their shares earlier than would be otherwise permissible.

Maybe some people know things the rest of us don't. As they say, proceed with extreme caution.

Karlin Lillington is at karlin@indigo.ie