Article_-_Are_Internet_Stocks_Overvalued - Manager's...

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Manager's Journal: Are Internet Stocks Overvalued? Are They Ever By Jeremy J. Siegel . Wall Street Journal . (Eastern edition). New York, N.Y.: Apr 19, 1999 . pg. A.22 Editor's note: Is the gold rush for Internet stocks justified? Will this revolutionary new medium also mean revolutionary profits for high-tech firms whose shares today sell for hundreds of times earnings? Manager's Journal posed the question to two experts. Next week: The case for Internet stocks. "Investing in Internet stocks is like playing the lotteries," Federal Reserve Chairman Alan Greenspan told Sen. Ron Wyden of Oregon in January. "Some may succeed, but the vast majority will fail." Yet so far, few investors have failed by buying Internet stocks. And buyers of these stocks will continue to make money as long as they convince the next guy that the stock will be worth more tomorrow than it was yesterday. But no market in history has continued to rise without bound. The Dutch tulip-bulb mania of the 16th century, the Florida land bubble in the 1920s and the speculations in precious metals in the 1980s all came to an end. Eventually the value of all assets must confront the law of economics. This law dictates that the value of any asset must be tied to the future cash returns paid to the owner of the asset. This law does not say that Internet stocks are necessarily overpriced. It does say that we must take a hard look at the valuations of these firms and decide whether their current prices realistically reflect their economic potential. A case in point is American Online, the current "blue chip" of the Internet stocks and the only pure Internet firm in the Standard & Poor's 500. AOL has a market value approaching $200 billion, putting it at or near the top 10 companies in market value in the U.S. Yet last year AOL was ranked only 311th in profits and 415th in sales against other U.S. firms and did not even make the top 500 in tangible assets. If AOL 's ranking in market value matched its ranking in profits or sales, the firm would have a value of about $4.5 billion. Ironically
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This note was uploaded on 07/09/2011 for the course MK MK 640 taught by Professor Dr.lee during the Spring '11 term at Jefferson College.

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Article_-_Are_Internet_Stocks_Overvalued - Manager's...

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