A second bubble?

The dotcom boom occurred almost a decade ago, but many entrepreneurs who were around in 1999 and 2000 will remember the hype – and the subsequent pain – of that giddy time, when it seemed the internet was about to change the very fabric of the economy.

Back in December 1999, shares in the then-fledgling online bookseller Amazon hit an astounding $US106.69. It didn’t last of course – the stock crashed below $US30 in the wake of the dotcom bust and actually went that low again in 2006 on the back of criticism from Wall Street analysts over its use of incentives such as free shipping.

But despite the state of the US economy, Amazon is once again flying. Last week its stock sped past $US106 and is now sitting about $US124.

And it’s not the only online retailer attracting the attention of the market. DVD rental service Netflix (NFLX) is also at an all-time high, while Priceline.com, which fell as low as $US6 at the start of the decade, are now trading at $US180. Stock in online jewellery retailer Blue Nile is up 165% this year.

So are we about to see the start of a new dotcom bubble? Not exactly.

It would certainly appear that US investors are back in love with online retailers, and the recent share price gains are pretty astounding given the mood of the US consumer.

But what is tempting investors this time around isn’t unbridled hype surrounding internet companies. Instead, they are being attracted by two things – strong business models and good growth prospects.

Amazon’s latest results – sales surged 28% in the third quarter to $US5.4 billion – highlight the company’s ability to grow even in a tough market. The company’s ability to keep prices low and offer consumers a huge range of goods lies at the centre of its success, but the way the company has effectively turned itself into a marketplace where third parties can sell goods (with a percentage of sales to Amazon, of course) has helped diversify and strengthen its revenue base.

The opportunities for growth are impressive too. As Paul La Monica points out on CNN Money, online retail is still only a relatively small part of the US retail market. According to government data, eCommerce accounted for just 3.6% of total retail sales in the June quarter.

How far Amazon’s rise has got to run isn’t clear – most analysts have a price target of $US120-130 on the stock. But investors can take comfort from one thing – there is a real, strong, dominant business behind the share price this time around, and not just a lot of blue sky.