Internet Stocks

[tcmay@got.net (Timothy C. May)]

At 11:14 PM 12/7/95, Adam philipp wrote:
>16% tumble today...
>
>   ...is the word getting out?
>

A few of you have corresponded with me about investments, Internet stocks,
etc., so I reckon there's enough interest out there to share a few thoughts
with you. Those who think this list has only to do with number theory or
PGP are of course welcome to skip this message now and get back to reading
Koblitz.

I won't say anything negative or positive about Netscape per se, but here
are some various developments:

* A Smith Barney analyst today made essentially the same sort of comments
that I (and maybe another or two) made several days ago, namely, that the
market capitalizations are incredible ($7 B for Netscape at $170/share),
that browsers are not a proprietary "franchise" (in that the standard is an
open one), that a lot of competition is coming (Spyglass Mosaic, Oracle,
Microsoft, etc.), and that many people hysterically bidding up the price of
Internet stocks are barely aware of what this "Internet thing" is. He
issued a "sell" recommendation on Netscape, an "underperform"
recommendation on Netcom, Spyglass, UUNet, etc., and was generally bearish
on the sector. (I saw him interviewed on CNBC, minutes before Marc
Andreessen was interviewed.)

* From a high on Tuesday of $170, Netscape was down to $130 at one point
today. I haven't seen the closing price.

* Analysts are also closely looking at the February '96 end of the
"lockout" in some stock sales by Netscape employees. Basically, a lot of
the shares that went to employees, etc., cannot be sold for 180 days after
the IPO, which was in early August of this year. The effects of shares
being put on the market is not clear, of course, and it is possible the
effects will be minimal. Still, it might be prudent to take this account
when considering strategies.

* Microsoft also made announcements indicating a move closer to a standard
Web browser strategy (as opposed to trying to sell the world on Microsoft
Network).  deal with Spyglass, and a licensing of JavaScript. (There've
been too many deals connected with browers, Java, etc. for me to even begin
to summarize here.)

* Sentiment moves in waves, as per the Dutch tulip bulb scenario, and what
was headed for the moon a few days ago is suddenly a turkey, to many. The
whipsawing in Netscape, UUNET, Netcom, etc., is incredible: up 30 points in
two days, then down 30 points in two days!

By the way, some have sent me mail asking about how to sell these and other
stocks short. One can sell them short directly (getting the money now and
agreeing to deliver the shares at a later date), but this is risky, should
these stocks rise. (And some of these shares are not readily available for
short sales, due to the limited number of shares on the market and the
difficulty of finding someone to lend the shares for a short sale.) One's
risk is essentially unbounded (but practically there are some reasonable
limits to how much the stock can rise, of course). Short sellers are always
advised to remember this maxim:

"He who sells what isn' his'n, must buy it back or go to prison."

(It is said that some of the rise in Netscape stock price is due to "the
shorts running for cover." That is, those who shorted the stock at, say,
$80 are frantically trying to buy the stock to close out their positions.
This can cause the relatively few shares to be bid further and further up.
As I keep saying, be careful in believing this or not.)

A safer strategy is to buy puts and calls, or to sell puts and calls.
Buying "puts" (my mnemonic: the right to "put it" to another investor)
involves, say, buying the right to sell a stock at some price in the
future. Thus, one might buy a put on the Internet Index
(http://www.amex.com), a collection of Internet-related stocks, to sell the
IIX at $25 in April, '96 for a strike price of $255. If the IIX goes _up_,
and as April approaches, that put will become worth less and less and may
become worthless. If the IIX goes _down_, that put becomes more worthwhile
(because one has the right to "put" it someone for $255 when the actual
value of the IIX has dropped to, say, $200. (Roughly speaking, at
expiration in April '96 this put will be worth $55, for a doubling of one's
original investment; the pricing of options depends on a lot of things,
including risk, time value of money, expectations, etc.)

At this point there are no widely-available puts and calls on most of the
recent high-fliers on the Internet. This is why the IIX looks to be a way
to play this game.

Interested investors should also look at LEAPs, which are essentially puts
and calls with much longer expiration dates. A friend of mine bought $25K
worth of Intel LEAPs (JAN96s) during the height of the Pentium debacle,
when Intel was trading at $30, and in the next six months this $25K
investment became worth over $300K.

(Needless to say, your mileage may vary. Don't blame me if you lose your
shirt. Bulls make money, bears make money, but pigs never make money, as
another maxim goes.)

--Tim May

Views here are not the views of my Internet Service Provider or Government.
---------:---------:---------:---------:---------:---------:---------:----
Timothy C. May              | Crypto Anarchy: encryption, digital money,
tcmay@got.net  408-728-0152 | anonymous networks, digital pseudonyms, zero
Corralitos, CA              | knowledge, reputations, information markets,
Higher Power: 2^756839      | black markets, collapse of governments.
"National borders are just speed bumps on the information superhighway."