Experts warn of Internet share crash

THE LAUGHTER over Wall Street just now is almost audible. It erupts daily with the opening of the markets and if you listen carefully you will hear a million tongues chanting two magic words. Dot-com, they recite over and over, dot-com. It is the sound of unrestrained cheer and, it must be said, of high anxiety.

Warning came from one of the Street's best-know sages yesterday: this is a bubble that will surely burst. And indeed an abrupt sell-off of Internet stocks in New York yesterday sent the Nasdaq exchange plummeting by an ominous 3 per cent.

This is the season, the chapter in human history, that the world found the Internet. And went nuts over it. The rules that Wall Street has lived by for decades - such as calibrating stock values against earnings - have been thrown out. Investors want nothing of common sense and caution. Show them an Internet stock and they will buy it; never mind if the company has no earnings.

The stars are well known. They include Amazon.com, the virtual book and compact disc seller. It still loses money and, according to some analysts, has little immediate prospect of seeing any profits at all. And yet its stock rose 966 per cent last year. The company is now valued at $18bn (pounds 10.9bn). Add to your list Yahoo!, with its Internet directory site, the digital auction house eBay and the grandfather of online services, America Online.

Speaking up for those fearing a crash-landing for these investors is Barton Biggs, chairman of the Morgan Stanley bank and oracle of the markets. He warned, in particular, of the inexperience in matters of the market among most of the investors wooed by the magic of the Net. "They are buying stocks strictly on the basis of their personal experience in the Internet," he said yesterday in a speech in Japan.

"It's the wildest thing I've ever seen," commented Chuck Hill, research director of the market researchers First Call in New York. "I think the market as a whole is over priced and that we're in a bubble and the extreme within that bubble is the Internet stocks."

Some see parallels with the Dutch tulip craze of 1635, when investors worldwide rushed to spend today's equivalent of $17,000 to $76,000 on a single bulb. What made a humble bulb such a must-buy is hard now to imagine. But the Internet seems more compelling. We are in the midst of a new revolution, the argument goes, akin to the dawning of the industrial age.

Believers say that a whole new society is opening before us, where commerce will no longer be conducted in the physical world of bricks and mortar but in the digital world of cyber-space. The swing of the shop door will give way to the mouse-click and the browser. And there is evidence to support the theory. In this last Christmas season, no fewer than 17 million Americans entered the universe of the Internet for the first time. Most of them were there to buy things.

And so the stocks have risen. Most startling have been the serial initial public offerings (IPOs) in recent months of new companies with one thing in common: no profits, but dot-com after their name. It was five weeks ago, for example, that theglobe.com, the company that now is seeking a partner in Britain, listed itself on the Nasdaq and saw the value of its shares rise 606 per cent in that first day.

The flood of money, most of it from small investors but recently from institutions as well, has thus propelled market values to truly astonishing heights. The auction house eBay, which is essentially a non-stop car- boot sale in cyberspace, is now worth six times as much as Sotheby's. No wonder the latter announced this week that it is to launch its own web site, to be called sothebys.com.

Founded only 1994, Yahoo!, that has the most popular portal site in the industry, offering one-click access to entertainment, news, online shipping and (of course) stock trading, is now worth twice the empire that Rupert Murdoch built. No wonder he tried this week to pour cold water on the Internet, suggesting it would destroy more companies than it created. Yahoo!, indeed is more valuable than General Motors.

The same sums can be made for America Online. The company, which recently made headlines gobbling up browser pioneer Netscape, is more valuable today than either Du Pont, Chevron or Eastman Kodak.