FOOL PLATE SPECIAL
An Investment Opinion
by Louis Corrigan

Supplying Gravity to the Net

How many times have you read about Internet stocks defying gravity? Probably a lot. But the laws of physics don't really explain much about stocks; they just offer journalists a nifty way to say that the suckers keep going up. Of late, though, the suckers have kept going down, or looked like they want to.

Today, the Net stocks rallied on the open, plunged, and have now staged a new rally. At their lows, though, the bellwethers were off sharply. America Online (Nasdaq: AOL) was down $10 7/16 to $105; Yahoo! (Nasdaq: YHOO) was off $6 7/16 to $120 1/2; and Amazon.com (Nasdaq: AMZN) was down $7 1/6 to $104 1/2. You don't have to be a technical analyst to see that all of these stocks dipped below their recent support levels and have so far failed to bounce decisively. Given the momentum-driven nature of Internet stocks, traders may key off this factoid to push these stocks even lower should the midday rally fail. At their morning lows, the latter two had given back all of their 1999 gains and were sitting more than 50% below their all-time highs.

Rather than a case of a bubble submitting to the laws of Newtonian physics, though, I'd take this as an example of the laws of supply and demand. Consider yesterday's long-awaited initial public offering of barnesandnoble.com (Nasdaq: BNBN), the number two online bookstore controlled by Barnes & Noble (NYSE: BKS) and German media behemoth Bertelsmann AG. The company priced 25 million shares at $18 a piece, the high side of expectations. But this brand name e-commerce stock more or less fizzled in the aftermarket, closing up a modest 27% at $22 15/16. Yes, it was an ugly day to take a Net stock public, which may explain why the stock has rallied to $25 3/8 today. But given the $18 offering price, investors injected a whopping $450 million into the company. The same day, BN.com's most obvious competitor, Amazon, lost nearly $6 a share, or around $942 million in market cap. Factor in the ill effects of a bleak day for Net stocks, and one can almost see traders pulling money out of Amazon to buy BN.com.

This example is merely illustrative of what's happened in a broader sense as the investment bankers have revved up their IPO machines, cranking out dozens of new Net stocks in recent months while demand has been robust. One could point to numerous other examples. Online financial news site TheStreet.com (Nasdaq: TSCM) got a hearty Wall Street reception on May 11. The same day, competitor Marketwatch.com (Nasdaq: MKTW) rose slightly to $65 on the enthusiasm. Yet, within a week, it had fallen decisively to new lows in the $50s (and now $40s). In short, supply reshapes demand, and thus market prices -- just as surely as an apple vendor on one street corner sees customers siphoned off by the appearance of a rival apple cart across the street.

That's why investors might consider looking at the eye-popping billions in Net stock market value as an accurate sign of the opportunities in the sector, of the collective perception of market participants that the sector deserves major capital infusions. Yet, that doesn't mean that any single company's market value is really justified. Some may be; most probably are not. That means, for instance, that Marketwatch was valued at over $1 billion not because it was worth that, but because the market perceived real opportunity in online financial news, essentially beckoning TheStreet and others into the market.

Of course, I have no idea whether Internet investors who've profited again and again by buying the dips will be disappointed this time. But if you consider the dynamics of supply and demand at work, you have to think that the rallies may become less robust and that even perceived Net leaders may have already hit highs that won't be tested for years to come.

UPS

Online discount brokerage DLJ Direct (NYSE: DIR) picked up $5 3/4 to $25 3/4 this morning in its first session as a publicly traded entity. Direct, a subsidiary of brokerage firm Donaldson, Lufkin & Jenrette (NYSE: DLJ), sold 16 million shares of its tracking stock yesterday at $20 a pop, raising $320 million before expenses. The shares opened this morning at $26 5/8.

Bristol-Myers Squibb (NYSE: BMY) rose $1 15/16 to $66 11/16 this morning. The company has an agreement to co-market Avandia, a new diabetes treatment, with U.K. drug maker SmithKline Beecham (NYSE: SBH). For more on this story, head back to today's Breakfast With the Fool.

High-speed cable Internet access company @Home (Nasdaq: ATHM) rose $3 15/16 to $116 3/4 following reports that CEO Tom Jermoluk said the company is on track to have one million subscribers and be profitable by the end of the year. The company's acquisition of Excite (Nasdaq: XCIT) is set to close Friday, he said.

Network computing company Sun Microsystems (Nasdaq: SUNW) brightened $1 1/8 to $56 3/16 as a federal judge tentatively sided with the company in a lawsuit that alleges Microsoft Corp. (Nasdaq: MSFT) infringed on Java copyrights in some of its software products. The judge also suggested that Microsoft may legally develop its own independent version of Java. The court has scheduled to hear oral arguments on the issues for June 24.

Internet software and online training products provider 7th Street.com (Nasdaq: SEVL) rose $1 1/32 to $6 1/2 after IBM (NYSE: IBM) agreed to distribute its learning content across three channels: its small business computer training courses, its learning services sales team, and its global online campus for IBM employees.

Analog and mixed-signal semiconductor products maker Semtech Corp. (Nasdaq: SMTC) plugged in $1 to $39 1/4 after turning in fiscal Q1 EPS of $0.29, flat with last year's figure but $0.02 better than IBES' four-analyst estimate. The strong demand for the company's products that drove a 12% revenue boost continued in the first three weeks of May, Semtech said.

Offshore drilling contractor Marine Drilling Companies (NYSE: MRL) piped up $15/16 to $13 after Credit Suisse First Boston started coverage of the company with a "buy" rating and a $19 per share price target.

Automotive parts retailer The Pep Boys - Manny, Moe & Jack (NYSE: PBY) improved $1 3/16 to $19 3/8 this morning. Prudential Securities upgraded the stock to "strong buy" from "accumulate," and boosted its share price target $2 to $25.

Enterprise application integration software company New Era of Networks (Nasdaq: NEON), a February Foolish Double, glowed this morning, adding $1 3/46 to $41 1/4 as Prudential started coverage of the company with a "strong buy" rating and a 12- to 18-month price target of $55 per share.

Internet services provider MindSpring Enterprises (Nasdaq: MSPG) sprang up $2 3/4 to $71 3/4 after it announced plans for a 2-for-1 stock split effective June 25.

DOWNS

Laser vision correction systems designer VISX Inc. (Nasdaq: VISX) was zapped for a $6 1/2 loss to $48 7/8 after a front page story in The Wall Street Journal discussed various legal disputes involving the company and raised questions about the enforceability of its laser vision correction patents. Summit Technology (Nasdaq: BEAM), which has cross-licensing patent agreements with VISX, lost $2 1/4 to $16 5/8.

Online and direct retailer Shop At Home (Nasdaq: SATH) was marked down $1 1/4 to $8 5/16 after announcing plans to sell 8.85 million shares in a secondary offering, including 850,000 shares currently owned by selling shareholders. The company said it will use the money from the offering to repay a $20 million bridge loan, develop and launch a collectibles e-commerce website, buy additional TV stations, and install a new corporate computer system.

Database software company Oracle Corp. (Nasdaq: ORCL) fell $1 to $23 after Reuters reported that Credit Suisse First Boston cut the company's fiscal Q4 earnings estimate to $0.30 per share from $0.33 per share and reduced its 1999 estimate to $0.82 per share from $0.85 per share.

Online services conglomerate America Online (NYSE: AOL) lost $2 7/8 to $112 1/8 this morning. Two former AOL volunteers have filed a federal class-action lawsuit against the company to obtain back wages, The New York Times reported. The volunteers allege that AOL violated the Fair Labor Standards Act, a federal law that mandates a minimum wage for employees, by not compensating them and thousands of other volunteers for their work moderating chat rooms and policing bulletin boards.

Voice, video, and data hardware and software systems provider ADC Telecommunications (Nasdaq: ADCT) dropped $2 15/32 to $46 3/4 after broadening its fiber optics components product line by acquiring privately held fiber optic pump laser diodes and modules maker Spectracom for $60 million in cash and a possible $45 million payment based on future technology developments.

Desktop publishing software developer Adobe Systems (Nasdaq: ADBE) crumbled for a $6 7/8 loss to $69 1/2 after Prudential Securities started coverage of the company with a less-than-inspiring "hold" rating and a 12- to 18-month price target of $71 per share.

Rural markets Internet services provider (ISP) OneMain.com (Nasdaq: ONEM) slipped $3/4 to $18 1/2 after acquiring Wichita, Kan.-based ISP Feist Internet Services. Terms of the deal were not reported.

Commercial office properties real estate investment trust Arden Realty Inc. (NYSE: ARI) dropped $15/16 to $25 after Morgan Stanley Dean Witter cut its rating on the company to "neutral" from "strong buy."

Sneaker and athletic products retailer Just For Feet (Nasdaq: FEET) was stepped on for a $7/16 loss to $8 3/8 following a U.S. Bancorp Piper Jaffray downgrade to "buy" from "strong buy." Yesterday, the company lost 17% after posting fiscal Q1 EPS of $0.15, down from last year's $0.19 and $0.02 below estimates.

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Contributing Writers Brian Graney (TMF Panic), a Fool David Marino-Nachison (TMF Braden), a new Fool Editing Brian Bauer (TMF Hoops), another Fool Bob Bobala (TMF Bobala), a Fool's Fool Jennifer Silber (TMF Amused), Fool at last