Internet Builders Lead Market Recovery
By Dick Satran
SAN FRANCISCO (Reuters) - From the rubble of the Internet stock sell-off, it's the builders leading the recovery.
The companies that provide technology for setting up e-commerce are proving the most durable players in the new economy
-- holding up much better than ones that generate revenue directly on the Internet, either through online sales, advertising or
by taking a cut of business transactions.
The ``plumbers'' or the ``picks-and-shovel'' people, as they've long been known, have soared in the aftermath of the
April-May plunge, as newly chastened investors look for companies that are ``safe bets'' -- able to grow and profit no matter
who wins the e-commerce battle of the next decade.
But in this year's 40-percent Nasdaq plunge, even the safest of the safe, companies like Cisco
Systems Inc. (NasdaqNM:CSCO - news), Sun Microsystems Inc. (NasdaqNM:SUNW -
news) and Oracle Corp. (Nasdaq:ORLC - news) whose products are the basic building
blocks of the Internet, were hammered by investors' doubts.
Fast-growing start-ups without the decade-long track record of the tech giants were hit even
harder, with some falling as much as 75 percent from their peaks earlier this year.
In the past week's rebound, though, it's the smaller ''pure-play'' Internet builders that have gained the most, climbing 30
percent to 40 percent in a week's rally that saw Nasdaq recover 19 percent.
A few of the nuts-and-bolts Internet companies illustrate the trend. Broadcom Corp. (NasdaqNM:BRCM - news), which
makes chips used widely for networking, climbed 42 percent during the week; JDS Uniphase Inc. (NasdaqNM:JDSU -
news), an optical networking components company whose products are boosted by the Internet's growth, climbed 50
percent in the week. Network Solutions Inc. (NasdaqNM:NSOL - news), the main registry for Internet names, soared 52
percent.
All those big gainers are viewed as virtually indispensable parts of the Internet ``infrastructure'' -- and they are models that
scores of other companies, producing both hardware and software, want to follow.
``There's nobody that wouldn't want to be identified that way,'' said Arnold Berman of WitSoundview.
But for investors, that's going to be an increasingly difficult problem, as the definition proves ever more elastic, and more
companies try to fit themselves into it, including everyone from over-eager content companies to legacy chipmakers.
Some are being clearly deceptive -- others are falling into a gray zone. Inktomi Inc. (NasdaqNM:INKT - news), known as a
search engine technology company, produces network caching technology that gives it Internet ``builder'' status.
InfoSpace Inc. (NasdaqNM:INSP - news), a software that helps create Web sites and interfaces, sells itself as ``a leading
global provider of information and commerce infrastructure services.'' But it has no central role on the Internet.
Commerce One Inc. (NasdaqNM:CMRC - news) and Ariba Inc. (NasdaqNM:ARBA - news), as builders of e-commerce
marketplaces and Internet-based order systems are also often put into the category, though some would debate that they play
a central role. Digital Island Inc. (NasdaqNM:ISLD - news) and Akamai Technologies Inc. (NasdaqNM:AKAM - news)
are companies with technology that speeds and improves performance of Web sites, but they are not essential elements of the
network, and both have competitors.
But beyond the problem of defining which are the true infrastructure stocks, says Christine Nairne of online investment bank
E+Offering, investors must deal with a high level of market volatility in a sector that still has relatively high valuations and
expectations for continuing strong growth.
``The whole market swing phenomenon has provided people with an opportunity for taking a closer look at what they are
buying and selling,'' said Nairne. ``If the market goes down, these (infrastructure) names will go down a lot, and if market
sentiment continues to be generally positive, these types of high growth stand to benefit a lot.''
Berman says he looks for companies that have the critical mass to become much larger and win dominance in the shootout
over the technology that will rule on the Internet. Once they attain that status, they become an essential ingredient for
everybody doing business on the Web.
``The real attraction of these stocks is that even if the economy slows, nobody is going to stop building their e-commerce
capabilities,'' said WitSoundView's Berman. ``There is no corporate spending priority in the world that's higher than
e-commerce right now.''
But figuring out who will be the essential builders of the new economy is more difficult. In a sense, Berman, said, the
companies will define it themselves by showing strong results over the year ahead. Those who slip up are likely to just
disappear.
``Definitely, over time, there will be a shakeout,'' agreed Nairne. ``But it's going to happen at different times in different
sectors.'' |
