The danger of applying artificial intelligence to Web share deals

I see that, one of those Internet companies with the clumsy names, has made a less than clumsy debut on the Nasdaq market in the US, showing a sevenfold increase in value in early share dealings.

This event has been leapt upon by bullish commentators as a demonstration that there is not only life but vigour in the market for flotations, or initial public offerings (IPOs) as the Americans call them.

I have no reason to believe that is worth anything other than every cent of its after-market premium. Indeed, I wrote only recently that Internet stocks were going to be the investments which create the millionaires and billionaires of the new millennium.

That said, a note of caution is called for. When I wrote enthusiastically about Internet shares, we were in the ructions of a new bear market.

The sector’s stocks largely bucked the downward trend. Listed online services, such as book retailer Amazon, suffered initial valuation setbacks, only to recover as sentiment began once again to support well-run Internet companies. That was an October story.

More recent events in the US IPO market would seem to bear out this theory. But, by the same token, let’s not get carried away.

There are still concerns emerging about the hype surrounding some Internet company valuations. Some of this concern is directed at the unblinking support that commentators have offered from a position of relative ignorance. Having provided some of that support, I feel obliged not to join the ranks of the entirely ignorant.

I was involved with the launch of Electronic Share Information (ESI) in London in 1995, a service launched to provide real-time share information and dealing over the Internet. Some 200 commentators must have attended the launch and/or been briefed, from which about 14 elected to accept an invitation to link to the Internet for a service demonstration.

I wonder whether that implies that more than 180 pundits were already Net-literate. I doubt it. Nor do I seek to suggest that they were indolent in their examination. The fact is there is so much commentary from lawyers and spindoctors regarding the Web that you don’t have to be a Net expert. The result is that everyone is regularly commentating on the commentary.

Does this matter? Yes, I think it does, because on occasions – possibly in the US IPO market – it can mean that the online industry is entirely valued as the result of spin, with fundamentals playing little or no part.

There is a saying in California’s Silicon Valley that all you need to launch a successful IPO in the Internet sector is to get “three dogs barking”. This might mean one dog barking in the valley, followed by one media dog, which in turn sets off a dog on Wall Street.

I think it might be simpler than that. It’s an image of a shanty town, where strangers are greeted enthusiastically by street dogs which wake up the neighbourhood.

How, we might ask, did Internet service provider Yahoo! come to be worth some $20bn (12bn)? The simple answer must be that the market is willing to capitalise it at that level. That makes a valuation irrefutable.

But I would ask you to consider a view from the other end of the equation. On Wall Street, it is asked how you might turn a $1 bill into a $10 bill. The answer, it is said, is by writing the word “Internet” on it.

Again, does that matter? Isn’t that how markets work, backing sentiment and the principle that a share is worth what someone else will pay for it? Well, up to a point.

I would cite three concerns. Firstly, there is the bio-technology precedent. Bio-tech companies came unstuck over the past year, not despite the hype of their prospects, but because of it.

Secondly, there is a danger that artificial markets could be emerging, particularly in the US, where there is a political need to maintain optimism in retail investment markets.

Thirdly, the Internet speaks with no authority in its own right. Since there is no proprietor, massed individuals and vested interests compete with one another to talk up the market.

Any one of those factors could lead to a dangerous over-inflation, both of expectations and valuations.

An old colleague of mine used to warn that, if you suspected a dangerous new orthodoxy was emerging, you should look for Druids. By this, he meant that there were certain to be those around telling you the sun would surely rise, because it had always done so before.

A dangerous attitude in stock markets. There may be an orthodoxy emerging which would have us believe that Internet companies are highly valued because they’re so important. The trouble is that, equally, they are important because they are highly valued.

I don’t suggest they are anything other than exciting opportunities for investors. I just add a note of caution. Listen for dogs barking. And watch out for Druids.

New Media, page 3


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