Is This

Like Californians rolling in their seats from a light earthquake out at sea, Internet stock analysts are looking at each other funny these days. Companies like TheStreet.com and Theglobe.com are hitting new lows and even “Internet blue chips” like Yahoo!, Amazon and eBay have lost half their value in the last few months.

It’s happening everywhere. My Atlanta fishwrap ran a chart showing how local outfits Mindspring, Checkfree and NetBank have lost more than half their value, then estimating the impact on the “fortunes” of their CEOs. (We’ve become sensitive to risk here lately. The man whose killing spree shocked the nation last week may have lost $300,000 day trading while the market was going up.)

What everyone is asking now is whether this is the time to buy, whether the storm is over, and whether the boom will return. After all, Internet stocks fell last summer and then recovered. And you shouldn’t be hurting — on average Internet stocks are worth twice what they were a year ago.

Maybe I’m old-fashioned (no, I’m definitely old-fashioned), but I’ve never evaluated Internet stocks differently than any other kind. You look at their earnings, their prospects, and give some issues a premium for fast growth in sales. You measure that value by dividing the earnings into the stock’s price to get what’s called a “price-earnings” multiple.

You can quickly check the P/Es of nearly any issue on Yahoo. Even at its August 4th close of $121, Yahoo’s “P/E” was 295. The “P/E” of eBay was 7575. Amazon, of course, doesn’t have a P/E because it’s still losing money. And these are the “blue-chips,” mind you.

I knew that Internet stock values had thoroughly disconnected from reality back in March, when USA Network’s deal to buy Lycos fell apart. The February proposal fully-valued Lycos, then worth $6 billion, and matched it against real assets like the Home Shopping Network cable channel and Ticketmaster ticket-buying service. CMGI head David Weatherell threw the monkey wrench into the works, and Wall Street hailed him as a “genius.” Lycos today is worth about $2.874 billion, and CMGI is down over 50% from its April high. (Even at that level, CMGI’s “P/E” was over 223.)

In other words, the boom is only over when Internet stocks can be rationally evaluated against retailing or broadcasting or copper stocks. Yes, their earnings will still be worth more, assuming they keep growing. But the P/E for a really high-quality stock like General Electric is 35, and at over 25 the market as a whole is grossly overvalued on an historical basis. I can get a 6% return on a U.S. government bond with no risk, which I figure as a “P/E” of about 17. That’s what I compare Yahoo to.

That’s the answer to the question everyone’s asking. When that last paragraph makes sense to you, when real earnings mean more than speculative returns, then the boom is over. As long as I sound like a crank, you just felt a mild jolt.

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