Dow Jones Internet Index

views updated

DOW JONES INTERNET INDEX

Since its inception in February of 1999, Dow Jones and Co.'s Dow Jones Internet Index has served as a benchmark for the stock performance of U.S.-based Internet companies. Companies listed on the index must use the Internet to garner at least 50 percent of their annual sales, must have operated as a public company for a minimum of three months, and must have a market capitalization (the full value, expressed in dollars, of all outstanding shares) averaging $100 million or more over three months. A company's stock also must average a closing price of roughly $10 per share, and it must be traded frequently enough to offer liquidity, which allows investors to buy and sell without major disturbance.

Dow Jones established the Dow Jones Internet Index in response to the intense trading of Internet stocks that took place in the late 1990s. The Internet stock craze began in the mid-1990s when a few up-starts found themselves boasting billion dollar market valuations soon after their initial public offerings (IPOs). For example, when Netscape conducted its IPO in 1995, its stock price jumped 108 percent in a single day. Less than a year old, Yahoo! was valued at almost $1 billion after it completed its IPO in 1996. The stock of online auction site eBay jumped more than 900 percent within three months of its 1998 IPO. The following year, an unprecedented 240 Internet-based firms went public. Dow Jones decided to create its Internet Index early in 1999 because, as stated by Dow Jones Indexes Managing Director Michael A. Petronella in Information Today, "Internet stocks have rapidly become among the most volatile, popular sectors of the equities market. This has led to the need for an Internet benchmark that can be the standard Internet stock measurement tool for all investors."

Dow Jones wasn't alone in identifying the need for a stock index for Internet companies. In fact, several competing indexes were in operation by the end of 1999. For example, the Business 2.0 Internet index included 20 stocks, while the USA Today Internet 100 indexed 100 stocks. TheStreet.com and [email protected] Week @Net also had launched Internet indexes, and Internet.com operated Isdex. Dow Jones believed its name recognition and concrete inclusion criteria would differentiate its index from those offered by rivals.

The firm divided its Internet Index, which consisted of 40 stocks, into two sub-indexes: the Services Index and the Internet Commerce Index. Companies originally listed on the Service Index included America Online Corp., Netscape Communications Corp., and other entities like Internet service providers and Internet access providers. America Online was later removed from the index when it merged with Time Warner, because the bulk of its revenues were attributed to the non-Internet operations of Time Warner. The Internet Commerce Index included companies engaged in some form of Internet-based e-commerce, such as book e-tailer Amazon.com Inc. and online stock trader E*Trade Group Inc.

By the end of 1999, the Dow Jones Internet Index had grown 167 percent since its inception. However, that meteoric rise was soon interrupted by what became known as the dot-com fallout. Between May of 1999 and May of 2000, the Internet Index grew only 3.1 percent. By October of 2000, more than 60 percent of Internet upstarts were trading below their initial IPO price. Companies that had once been listed on the Dow Jones Internet Index at a price-to-earnings ratio of more than 300meaning that the firm could have been sold for 300 times what it secured in earn-ingsfound their stock prices plummeting as investors, no longer willing to overlook poor earnings or a lack of profitability, began dumping shares. Many of the firms that had yet to earn a profit folded, and even those that had achieved profitability, such as Yahoo! Inc., saw stock prices nosedive. In fact, Yahoo!'s stock, which had reached a high of $237.50 per share in January of 2000, was hovering around $20 per share in early 2001.

At that time, along with Yahoo!, Amazon.com, and E*Trade, the Internet Commerce Index included Ameritrade Holding Corp.; CNET Networks Inc.; Ebay Inc.; FreeMarkets Inc.;MP3.com Inc.; Next Card Inc.;Priceline.com Inc.; Ticketmaster; Vertical-Net Inc.; WedMD Corp.; and Webvan Group Inc. The Service Index included Akamai Technologies Inc.; Ariba Inc.; Art Technology Group Inc.; BEA Systems Inc.; Broadvision Inc.; CheckPoint Software Technologies Ltd.; CheckFree Corp.; CMGI Inc.; Commerce One Inc.; Covad Communications Group Inc.; Doubleclick Inc.; Earthlink Inc.; [email protected]; Exodus Communications Inc.; I2 Technologies Inc.; Info-space Inc.; Inktomi Corp.; Internet Capital Group Inc.; Interwoven Inc.; Portal Software Inc.; PSINet Inc.; RealNetworks Inc.; TIBCO Software Inc.; Veri-Sign Inc.; and Vignette Corp.

FURTHER READING:

"AOL-Time Warner Merger Will Trigger Changes in Dow Jones Internet Indexes." Business Wire. January 2, 2001.

Colkin, Eillen. "Net Stocks Tracked." InformationWeek. February 22, 1999.

"Dow Jones Indexes Launches Internet Index." Information Today. April 1999.

"Dow Jones Internet and Technology Sector Indexes Become Now Tradable Through New Exchange-Traded Funds; Total Assets Linked to Dow Jones Internet Indexes Top $240 Billion." Business Wire. May 18, 2000.

Futrelle, David. "The Internet Index Mania: There Are Many Benchmarks, but Few Measure Anything Meaningful." Money. November 1, 1999.

Henssler, Gene W. "Past Year a Great Lesson." Georgia Trend. February 2001.

Johnson, Patrice D. "On Internet Time." Money. December 1, 2000.

SEE ALSO: Shake-Out, Dot-com; TheStreet.com; Volatility