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This summer has been brutal for internet stocks. But we have been here before. Let us forget for a second about last summer and the summer before when stocks caved in over fears that we were finally going to be in a recession. It did not happen – and it is not happening now.

Instead let us talk about 1997 when the Asian default crisis hit. With fears of recession in the air, I was worried I would have to downsize my business. At the time my company, Reset Inc, built websites – mostly for entertainment companies and covering everything from films The Matrix and Scream to hip-hop stars Puffy and the Wu Tang Clan. We were always busy but also nervous that “this internet thing would go away”.

During the summer, all the internet stocks (newly public at the time) started coming down to earth. Even a darling such as Yahoo sported a $200m market cap for a while – I thought it was too expensive then and now at $40bn I think it is too cheap. Budgets were being cut and for a while people stopped returning my phone calls.

The markets rebounded and the Standard & Poor’s stocks had a good year. Everyone assumes now that this was because the Federal Reserve stepped in and cut rates and pumped liquidity into the system. While partly true, this gives the Fed too much credit.
An entirely new emerging economy was being born.
It created its own liquidity through initial public offerings, through venture capital, and through the fortunes amassed by its founders.

The same goes for 1998, when the Long Term Capital Management scandal tore the markets to shreds and the Fed again stepped in. That summer was the worst time in my life because I was selling my company. Why would I sell if the internet was only getting bigger? It was because the cost of even creating an internet business was destined asymptomatically to go to zero. I was charging the cable television channel HBO $75,000 to put together a 10-page website for the Dennis Miller Live show because at the time nobody else knew how to do it. But junior high school students were learning the skills that would let them do it for $10 an hour and PhDs in India were ready to undercut those students. Now it is even worse.

With the markets going down, my buyer was backing off until the IPO of theglobe.com (and more rate cuts from the Fed) again unleashed the hordes.

Everything went into repeat in 1999 when the Fed finally ended the party after a strong jobs report in May. Ebay, AOL, Yahoo and Amazon went down 20-50 per cent in a few months – only to more than double as the Nasdaq 100 Index went up about 101 per cent off the lows over the next eight months. Each time the short-sellers cried: “The monster is dead. Let’s go in for the kill!” only to get bucked like an amateur off a raging bull.

The same sounds are echoing again. The internet economy is still emerging, with only 3 per cent of US retail sales being completed online and less than 10 per cent of advertising revenue coming from the web.

When the market snaps back in autumn – as it will, particularly when it is clear the Fed is pausing – the stocks to buy are those that have been making the smartest acquisitions. News Corp, with its $500m purchase of MySpace.com, the social networking site, is a clear winner, and Yahoo, with its acquisitions of Flickr and Del.icio.us demonstrates its willingness to get into user-generated content. With its acquisition of Shopzilla, Scripps is becoming the dominant force in comparison shopping and hence online retail. It is also a nice arbitrage between its traditional media valuation and the valuations of more internet-centred companies.

I am not prepared to say the New York Times is in the same boat but the double-digit growth in its about.com property puts it on my radar. And the Chinese stocks Hooray, Kong, Shanda and Netease have been buffeted by the uncertainty of doing business in China but have strong cash positions and growing cash flows.

I also expect more social networking to rise, particularly “meta-social networking” combined with traditional internet features such as search and shopping.

Expect aggregators to rise to help people navigate the morass of junk videos uploaded every day to sites such as Youtube, break, and metacafe. And expect the 60m-plus baby boomers who are moving to the internet to expect a little handholding but also a little fun. Finally, try to relax a little this summer. It’s halfway over today.

james@formulacapital.com

Copyright The Financial Times Limited 2017. All rights reserved.
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