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Mary Meeker Warns of "Irrational Exuberance" After Stock's Phenomenal 2.6% Gain

Sunnyvale, Cal. ( — The stock of Internet infrastructure firm Loudcloud soared almost 3/16 of a point in its IPO last week, setting a record for 2001 dot-com debuts and leading many to worry that investors will be caught up in some kind of "dot-com mania" that inspires them to bid up anything Internet related.

A Wild Ride for Investors

The stock, which priced at $6, rocketed to $6 33/64 before ending at $6 5/32, a mind-boggling first-day gain of nearly 16 cents a share.

"Never in my wildest dreams did I expect this kind of opening," said Loudcloud co-founder Marc Andreessen, whose previous company, called Netscape, was also reportedly involved in the Internet. "I am, frankly, humbled."

By Tuesday, the stock had settled back to $6 1/16, but Bear Stearns analyst Trudy Wellstones issued a "strong buy" on Loudcloud and set a 12-month price target of $6 11/64. Traders on stock message boards, however, were considerably more hopeful. "This stock is pulling out of the station folks! $6 17/32 in two weeks!" advised one trader, identified as H_Blodget98. "Get on board the Internet train before it's too late!"

But Morgan Stanly analyst Mary Meeker publicly wondered if Loudcloud's performance was a sign of "irrational exuberance" in the markets, and warned this kind of speculative investing could lead to a "dangerous bubble which I, as an analyst, want nothing to do with."

"We're talking about a company that is only a year and a half old, that in the past nine months lost $175 million on revenues of $6.6 million, and that relies solely on the Internet for its business," said Meeker. "That a company like this would go public at all is brazen. That it would gain 2.6 percent in a single day is beyond comprehension."

Federal Reserve Board Chairman Alan Greenspan, however, argued that these so-called "dot-coms" are unlike anything to come before, and should be valued differently. "My sense is that with Internet companies, we should throw out the book and apply a new set of metrics," said Greenspan. "It's not just about revenues and profits. Yes, this company lost $175 million, but if the Internet hits big, there's no telling how high this baby could go."

Investors lucky enough to get in on the $6 opening price already have a sense of how high. For example, someone who bought 100 shares of Loudcloud at $6 and sold at the close Monday cleared a whopping $16.25, before commissions. The average investor, however, never saw the stock at its offering price.

"I put in a pre-open market order, but by the time it went through, the stock was in the stratosphere at $6.24," said Atlanta-based day trader Neal Hurtz. "Right now I'm sitting on a paper loss of nearly $80. I'm shell-shocked. What the hell's going on?"


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