Just got off the phone with Jason Avilio, the Web analyst at First Albany Corp. and an all-around bright guy. Back in a January 9 report, he warned that Web stocks were in for a rough ride because valuations had gotten out of hand even though fundamentals were in good shape. As my post the other day noted, this has turned out to be right on target. And so, I asked him, what does he think now that the tanking he predicted has, in fact, come to pass?
He thinks the market is in for a bit more pain, at least for another month and a half or so. His logic, in bullet points:
* First, there's no satisfying this market. "In a market with economic concerns, no quarter is good enough." True enough.
* Second, big and small Web players are both struggling with execution issues as well as strategies. "You hadn't had a fundamental issue with eBay ever until a few quarters ago -- now there's one issue after another." Also true. Yahoo's delay in getting its new ad-monetization server up and running is probably the best fresh example. (Hey, NOW maybe I believe Yahoo will merge with Microsoft, all financial and business logic be damned. Steve Ballmer and Terry Semel can play can-you-top-this over their product delays. If that's a drinking game, I'd buy BUD). Even Google's quarter was only OK, Avilio says. The earnings outperformance in the headline number was mostly a matter of a lower than forecast tax rate, and sequential revenue growth was inflated by currency adjustments.
* Third, August is coming. As Avilio tells it, a wary market is bringing down multiples at least until it knows more about what the Federal Reserve will do with interest rates. Plus, the summer doldrums will mean not much is happening in the stock market anyway, and the Internet is in the seasonal weak spot of its year anyway. There's no reason for a portfolio manager to take the risk of making a move until probably September. It's all downside -- the Fed may raise rates more, the economy may slow, someone may release bad news. And if things get better, the stocks won't move in August anyway. So the percentage move is to sit tight, learn more, and make the play (if any) when the ground is more fertile. Makes sense.
Avilio feels my pain. He saw my post the other day about having seven stocks in the BW Web 20 down 24% or more, and said not to worry. "Everybody has seven that are down 25%." Don't I know it.