If someone told you last year that the Dow would sputter to earth like a crippled bomber while Nasdaq would continue to soar like a three-stage rocket, you might have been dismissed as a fool. Generally, the Dow companies make money; generally, the New Economy names on Nasdaq strive to do the opposite. Stock markets are not supposed to work this way.
Nasdaq rose again yesterday, bringing its gain to 24 per cent this year and 111 per cent over the past year. In mid-1998, Nasdaq was toying with the 2,000 level; it's now at 5,049. The Dow, meanwhile, is down about 15 per cent from its mid-January peak as investors punish companies with real earnings and reward those that offer nothing more than the dim prospect of real earnings.
But all is not well in the la-la land of Nasdaq. If you look closely, the names propelling it forward are not the Internet and dot-com plays -- although some of them are flying high -- but the tried and tested infrastructure and computer-innards names, notably Cisco and Intel. Those two can take credit for about one-fifth of this year's rise.
Elsewhere, there is something approaching carnage. IVillage, the on-line women's network, has gone from a high of $130 (U.S.) to less than $24; eToys, the Web's toy retailer, has gone from $86 to about $13; TheStreet.com, the Web's best-known financial news site, has drifted into the low teens from a high of $71; Pets.com, the pet products retailer whose initial public offering last month was supposed to electrify the market, fizzled. Even the Internet's biggest names -- among them, America OnLine and Yahoo -- are well off their peaks.
We already know that a sharp division between the Old Economy (read: Dow) and New Economy (Nasdaq) stocks has developed. Now, it appears, the same division is developing among the New Economy stocks themselves. Simply put, there are companies with sustainable business models and those without, and the list of the possible winners and losers holds some surprises.
Take Amazon.com. Amazon defines the New Economy. It has taken an old business (book selling) and reinvented it. Any book can be bought on-line, 24 hours a day from the convenience of your home at prices that undercut the bricks-and-mortar retailers. Amazon is now using the business model to sell all sorts of consumer products, including music and videos. Investors, who have driven Amazon stock up almost 4,000 per cent since 1997, are obviously betting that a) the company will survive, b) that having survived, it will not just dominate the on-line book-selling market, but the book-selling market in general and, c) that it will make torrents of money doing so.
Is it possible that investors have got it horribly wrong? As Michael Lewis's column on Bloomberg News noted yesterday, Amazon is acting more like a charity than a business because it is selling books at or below cost. It presumably does this to help build customer loyalty. But customer loyalty, or, more precisely, lack thereof, is why Amazon flourished in the first place. The customers who were "loyal" to the traditional book retailers suddenly became disloyal when Amazon arrived. So why wouldn't they become disloyal again? As soon as Amazon raises its prices in an effort to become profitable, its customers might disappear en masse to the next on-line book retailer who keeps prices low. If loyalty is largely dependent on extremely low prices, then Amazon might never make a cent.
EcomPark, the Internet incubator and Web-design shop (whose own shares have been Canadian Venture Exchange high fliers in recent weeks), sees hundreds of dot-com business proposals a week and has a good sense of what will and will not work. Chairman John McMahon says the "build it and they will come era" is over and that his team is not looking at business models that "will change the world" because the world doesn't necessarily want to be changed. Instead, the promising proposals address a real market, create efficiencies within that market and have the potential to expand it.
He thinks, for example, that plans by Sears Canada to create an on-line shopping portal to boost its distribution clout are promising. Sears has brand recognition, tons of capital and all the right infrastructure, including warehouses and 800 delivery trucks. What better platform to sell Sears products as well as those of other retailers? Chapters Online would like to become the dominant shopping portal in Canada but lacks the infrastructure to support it. EcomPark also believes that using the Internet to make health care companies more efficient has a strong future.
The New Economy exists, but it increasingly looks like an improved version of the Old Economy. SearsCanada.com, or whatever it is to be called, makes sense because it extends the reach of a proven and profitable business. The Dow companies have to start thinking like Sears to get out of their slumps, and the Nadsaq companies will have to start thinking about profits to sustain their rallies.
