Internet Investing - New and Improved, Interesting article by Dale Baker
tigerinvestor.com
<Just when you thought that investing in Internet stocks was easy, a tidal wave of new Internet IPO's redefined the entire sector.
Just buying Amazon (AMZN) and Yahoo (YHOO) isn't enough to stay on top of the latest trends in Internet development. And it certainly isn't good enough to make serious money off the hottest Internet plays going right now.
What happened? Like any new sector, the Internet is still evolving. It just happens to evolve at much faster speeds than any other significant technical innovation we have ever seen. How long did radio take to progress from AM to FM? How long did it take for automobiles to spawn today's suburban communities? Decades from when they were first introduced.
The Internet is changing so rapidly that it is hard to keep up, both the technology it uses and the number of daily business and social functions we are transferring to the new electronic medium.
The World Wide Web is only six years old. Yet millions of us use it every day for work, pleasure, shopping, E-mail and dozens of other activities. Access speeds jumped from 9600 BPS to 56000 BPS to broadband speeds up to 45MBPS with a T3 connection. Eventually most of us will have a permanent Internet connection at home running at several hundred KBPS or faster.
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Let's take a closer look at the two different models for investing in Internet stocks - one for then and one for now.
In the Idiot's Guide last July, we looked at six basic categories of Internet stocks - ISPs, portals, E-tailers, online finance, software and “enabler” companies. If you bought the heavyweights in each sector in 1997, you are probably reading this on your yacht off St. Tropez thanks to your personal satellite ISP that lets you log on from anywhere in the known universe. You can afford it, believe me.
It was easy to buy prime Internet “gorillas” for $50 per share or less then, since fewer investors recognized the power of the Web. Including splits, most have gone up more than 1000% since then. All you had to do was buy AMZN, YHOO, CMGI, EBAY and a few other prime properties to cash in big time.
But you had to buy them at stratospheric valuations relative to their revenue and earnings at the time, and listen to everyone tell you that you were nuts for buying marginal startups instead of proven blue chips like Disney (DIS) and Coke (KO). (Hint: run a comparison chart of DIS, KO, AMZN and YHOO since October 1997. AMZN was up 1300%, YHOO up 1100%, KO -10% and DIS -20%).
The original “gorillas” covered most of what we were doing on the Web then - E-mail, news, basic searches, online investing, setting up our own Web sites and testing the waters to see if a credit card transaction online would be safe or not (another hint: that 16-year-old waiter that you never saw before in your life and just took your American Express card to pay for dinner can steal your card number a lot easier than a hacker trying to intercept Amazon's online transactions). Soon we were swamped by E-mail, tracking our portfolios every day and grabbing bestsellers at a tidy discount without leaving the house.
And those incredible Internet stocks started to go through the roof.
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Where is the Internet today? Moving ahead at warp speed.
To make money on the hottest Internet stocks, you have to stay on top of the hottest new sectors.
SPEED COUNTS
My top pick is broadband and wireless - The Internet is getting faster thanks to DSL service from companies like Copper Mountain (CMTN), NorthPoint (NPNT) and Covad (COVD). The 28800 or 56600 connections that must of us rely on today will look like 8-track tape decks in a few years. Cute, but not very efficient in retrospect. Indirect plays here include the major cable TV companies (including AT&T and Microsoft now) and bandwidth providers like MCI-WorldCom-Sprint (WCOM) or Global Crossing (GBLX).
Within giant corporate networks, speeds are rising thanks to technologies from F5 (FFIV), Radware (RDWR), Foundry (FDRY), Extreme Networks (EXTR) and others. Cisco (CSCO) and Lucent (LU) are still king of the hill but the steep upward price movements are happening in the new niche players that make networks scream in hyperdrive - or not collapse under thousands of simultaneous users.
Like Amazon and Yahoo in the early Internet days, the broadband and networking companies are experiencing tremendous growth as corporations find they need more speed and capacity on their Web site than they ever dreamed of two years ago.
Wireless is the next big step. I recently worked on a conference with a number of Europeans and Americans; everyone had a cell phone, but only the Finnish representative had a Nokia phone with E-mail capability. Ask him a question and he might say, “Let me E-mail my office in Helsinki about that.” Two minutes later, he had.
The move from cell phones to a wireless Internet platform is not a big leap psychologically. But the number of Internet users will explode once the “portable Web”
is a reality - messages, directions, restaurant recommendations, stock quotes, sales force reports, you name it and a busy executive will want it at his fingertips all day long. And he won't have to plug in an Internet device to get it, just reach in his pocket.
So far, the biggest player in this sector has been Phone.com (PHCM). Qualcomm (QCOM) just announced a major wireless data project, and the good folks at Nokia (NOK) and Ericsson (ERICY) already have wireless Web devices on the market. 3Com's (COMS) Palm Pilot is headed toward Web-access too.
Another niche is Voice Over IP (VOIP) players that digitize your telephone conversations and pass them over IP-style Internet networks. A hot new player here is Clarent (CLRN).
B2B
The next huge play is Business-To-Business or “B2B” for short.
Selling books to individual customers was a neat way to start online commerce, but helping businesses do business with their suppliers and their corporate customers is a multi-billion dollar gold mine. General Motors just adopted a solution from CommerceOne (CMRC) to connect the thousands of suppliers that contribute parts and services to building a GM car. Ariba (ARBA) and VerticalNet (VERT) are two other major B2B players.
Many B2B companies specialize in a certain niche at first, like PurchasePro (PPRO) and PCOrder (PCOR). Already analysts are talking about “vertical” players like ChemDex (CMDX) that specialize in one industry sector and “horizontals” like CMRC that offer a B2B solution that any industry can adopt.
SOFTWARE
Internet software is suddenly much more complex. Silknet (SILK), which I recommended as a small software player in the original Idiot's Guide portfolio, shot up to 100 as the Customer Relations Management (CRM) sector caught investors' attention. You can't just throw up a static Web site and expect people to buy whatever you post there; E-commerce Web sites have to interact with the customer and make his visit to your site a pleasant shopping experience. That is SILK's specialty.
Broadvision (BVSN) looks like the leader in E-commerce software, along with SILK, Calico (CLIC), Cysive (CYSV), Vignette (VIGN), Agile (AGIL) and Vitria (VITR). Among established tech companies, ORCL and IBM are big in this niche along with SE.
Expect the field to explode with new IPO's in coming months.
TRACKERS AND CONSULTANTS
Another offbeat niche worth exploring is companies that keep track of who is doing what on the Web. WebTrends (WEBT) makes tracking software for corporate Web sites that lets them know more about who is using the site. Media Metrix (MMXI) provides the equivalent of Nielsen ratings for Web sites, and Net Perceptions (NETP) also helps Web site hosts learn more about their users and customers.
When consulting firm Viant (VIAN) unexpectedly showed a profit last quarter, traders sent their shares through the roof along with competitors Scient (SCNT), Razorfish (RAZF) and Modem Media (MMPT). Firms that help other companies set up their Web presence are in hot demand.
I still think Marketing Services (MSGI) is a steal in this niche at under $20 per share.
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WHAT'S NEXT?
The Internet sector has moved from a handful of pioneers to hundreds of new companies in the market, each vying for attention and a fistful of hot investors' dollars (almost every big firm that IPO'ed this year has done or is planning a secondary offering at a much higher price than they IPO'ed). No doubt there will be four or five new sectors to write about in a few months.
There are already several other sectors we could discuss - advertising, Web site hosting, ASP's (Application Service Providers), etc. The list just keeps growing.
And next year - who knows?
That's what makes Internet companies an exciting sector to trade and invest in. Just be careful when the next 50% haircut hits (they happen - get used to it). And remind yourself that we are only getting started with Internet stocks.
Still lots more fun and profit to come.
Do you have a comment or a suggestion for a future 50% Gains Investing column? E-mail me at dabmu@yahoo.com.
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***Dale Baker as a contributing Author for The TigerInvestor.com , also runs the successful thread on SI
"50% Gains Investing " .........to be found here:
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