The death of arrogance

By Bambi Francisco, CBS.MarketWatch.com Last Update: 1:19 AM ET Oct 17, 2000 NewsWatch Latest headlines

SAN FRANCISCO (CBS.MW) -- "Idealism is fine, but as it approaches reality the costs become prohibitive," said William Buckley Jr. Those words might now be applied to the Internet.

Here's the ideal: everyone is on the same playing field as information becomes readily and instantaneously accessible on a worldwide network.

But the costs of that Utopia became prohibitive: a torrent of companies jumped on the bandwagon, igniting cutthroat competition for fewer dollars than expected, and ultimately leading to the death of many of these start-ups.

To some extent, it does go to show that optimism -- girded by arrogance rather than preparation -- can only get us so far.

Goodbye old tenets for Internet investing: invest in market opportunities that are "big, really big;" close your eyes; think good thoughts, and worry about profits later.

How's this for a guiding principle: intellectual arrogance is dead.

Evidence everywhere

There's evidence of that strain everywhere, from within the media, the visionaries held in the highest regard down to the peanut gallery.

Here's a quote I found from famed venture capitalist John Doerr back in May of 1999. "Believe it or not, the Internet is actually under-hyped," he said in an interview regarding his predictions for the millennium. "We are co-conspirators in the largest, legal creation of new wealth, primarily in Internet companies." See article.

Here's another from Guy Kawasaki, founder of Garage.com in February '99. If you want to make a revolution, one has to "create like God." See article.

Here's one MarketWatch's Shawn Langlois, keeper of our site's discussion groups, found from someone called Plunkett on February 17, 2000 on our chat room. "It scares me just how easy the market has been to predict. I know I might be jinxing myself, but it seems like everything I even think about buying brings at least a 50 percent return."

But intellectual arrogance was never displayed so emphatically than in the lofty price objectives predicted and fear-driven advice given by Wall Street analysts.

On display

Priceline.com (PCLN: news, msgs) has to be the poster child for this type of intellectual arrogance at its finest moments.

Morgan Stanley's Mary Meeker, with all due respect for her insightful analysis, came out with this doozey back in April 26, 1999 when she issued coverage on Priceline, the start-up her employer took public.

"Are we nervous about Priceline.com's valuation? You bet," she said in a note to clients. However, "for risk-oriented investors, the risk of missing a big winner here may be greater than suffering from what may become near-term valuation issues."

One day later, Merrill Lynch Internet analyst Henry Blodget, whose bold Amazon (AMZN: news, msgs) call inspired legions of analysts to catch momentum fever and make bold predictions as well, said Priceline could eclipse $150 within 12 to 18 months. (Merrill Lynch co-led the deal.)

And Henry thought he was giving himself time for the name-your-price pioneer to grow into that market cap. Shares, which were running up ahead of the initiations, closed at $76.38 on April 22 and jumped to $165 by April 30.

"This price should represent a multiple of 88 times our 2000 revenue estimate of $300 million," Blodget said, admitting that it was a tad expensive. But long-term growth investors "should own a basket of leading stocks despite their extreme valuations because the potential magnitude of the opportunity makes the risk/reward profile more compelling to be on-board than off."

Not to say that there weren't muffled voices in the backdrop shouting that the emperor had no clothes and soon would be freezing. If one were to have listened to David Trossman, then an analyst at Legg Mason, they would have sold Priceline shares on May 6, 1999, when he initiated coverage with an "under-perform," while cautioning that Priceline would just be a "niche brand for the very price sensitive." Trossman now works at First Union Securities.

Priceline hit $165 in the spring of 1999, giving it a market valuation of $30 billion. Shares began to unravel just weeks later.

Yet in May of 2000, DLJ's Jamie Kiggen reiterated that Priceline.com (PCLN: news, msgs) was worth $190 a share. The stock never saw that print. Now it trades at $5.

Kiggen recently moved to CS First Boston, as part of the merger of the two investment banks. He recently issued coverage on Priceline.com with a "hold" and a price target of $7.

Hall of Shame

Priceline, of course, wasn't the only stock to have price targets that were never reached.

As recently as this past July, Kiggen had a price target of $250 on Yahoo (YHOO: news, msgs) when he was at DLJ. Just last week, he initiated coverage on the Net media giant with a $100 price objective and a "hold" rating.

DLJ initiated coverage on business-to-business company FreeMarkets (FMKT: news, msgs) with a $500 price target this past January. Bear Stearns initiated coverage with a $300 price target in December before FreeMarkets even went public. The stock did hit $370 back in late December. Shares of FreeMarket now trade in the mid-40's.

AskJeeves (ASKJ: news, msgs) got up to $190.50 on November 17, 1999. The next morning, First Union Securities initiated coverage with a price target of $230. AskJeeves now trades at $13.

DLJ's Kiggen also had a $150 price objective on EBay (EBAY: news, msgs) this past July. Then when he moved over to CS First Boston, Kiggen initiated coverage on EBay with an $80 price aim.

Ventro (VNTR: news, msgs) was given a price objective of $300 by Bank of America on February 28, 2000. Ventro did hit $243.50 just one day before that call, around the time the operator of e-marketplaces took on its new name and shed its old name, Chemdex. Between February 22 and February 25, Ventro more than doubled as it took on a new name that marked its new business model.

Robertson Stephens had a $250 price target on Internet Capital Group (ICGE: news, msgs) this past March. ICG did hit $212 in December 22, well before the call was made.

What else is going on here?

Not only was there intellectual arrogance going on here, there was "intellectual laziness," said Greg Jones, director of research at Briefing.com, who provided me with this "Hall of Shame" list.

In Priceline's case, many analysts and investors believed Priceline's model could be applicable to other markets, from Webhouse Club's groceries to gasoline to cars. "There was blind acceptance rather than rational analysis about this model."

Even though I became skeptical of Priceline.com in June (See Priceline story from June '99) of last year, admittedly, I also "blindly" accepted a lot of business models and a lot of ideas regarding other dot-com companies.

How does one look at this and avoid the same pitfalls when looking at other opportunities or the next big thing?

Said Jones, "There's more competitors than you know; there could be relentless demand, but it's not necessarily for the current available product; and exponential growth isn't sustainable."

Like I said: "Intellectual arrogance is dead."

http://cbs.marketwatch.com/news/current/net_sense.htx?source=htx/http2_mw

-- Carl Jenkins (Somewherepress@aol.com), October 17, 2000

Answers

Excellent analytsis of the dot.com train wreck.

-- Uncle Fred (dogboy45@bigfoot.com), October 17, 2000.