Nuts-and-Bolts Net Firms Are Best Picks: U.S. Stocks Outlook
11/19/99 3:29:00 PM
Source: Bloomberg News
New York, Nov. 19 (Bloomberg) -- Internet shares are back after a crash that saw many of the stocks
tumble 50 percent or more from May through July.
The new stars of the market aren't the retailers that led the previous surge, though -- they're the newly
public ''infrastructure'' companies, including Sycamore Networks Inc., Commerce One Inc. and
Liberate Technologies Inc., that make the bridges and roads of the Internet, the fiber-optics, software
and semiconductors that speed access and make business possible.
And as more than 100 Internet companies prepare to take their shares
public, the nuts-and-bolts companies -- not retailers like Amazon.com
Inc. or eBay Inc. -- will be the best picks, analysts say.
''Early in the year, the Amazons and eBays had the most spectacular
performances, but during the latter half we've seen a shift toward the
infrastructure companies,'' said Steven Tuen, who helps manage the
$750 million Intenet Fund. ''Those are the ones that have been taking
off lately, especially in the IPO area.''
Sycamore Networks Inc. illustrates the trend. The company, whose
products allow faster data flow, soared almost fivefold in its first day of
trading last month and is now up 592 percent. ''Sycamore is helping to
make the cement helps build the e- business foundation,'' said Rich
Begun, who helps manage $12 billion at Orbitex Management Inc. and
bought about 4,000 Sycamore shares in the IPO and afterward.
''Infrastructure is the foundation that allows e-commerce to take place,
and faster, more efficient communication'' is key for developing Internet
technology.
Internet retailers aren't all losers, of course. The Bloomberg U.S.
Internet Index, which had fallen 46 percent since April, is up 82 percent since August; so is online
retailer Amazon.com Inc.
''A lot of people want a piece of the action now because they don't want to miss the train,'' said
Alberto Vilar, president of Amerindo Investment Advisors Inc., whose Internet- heavy Amerindo
Technology Fund is up 192 percent year to date. Investors are thinking, '''There's gold in them
Internet hills, and I want to buy some,''' Vilar said.
Retailers Lag
Many Internet retailers have been left behind, though -- the worst performer among recently public Net
companies is Musicmaker.com Inc., a CD retailer that's down 42 percent from its offering price, and it
has plenty of company among other retailers on the list of stocks in the red. Amazon.com is still 26
percent below its April high.
The really big gains have come in the nuts-and-bolts companies of the Internet.
Commerce One Inc., which helps link buyers and suppliers on the Internet, has posted the biggest
return in the Bloomberg Internet Index since its June IPO, soaring 1,465 percent.
Many of the 132 Internet IPOs since July were infrastructure companies, and they were the best
performers, according to CommScan, an investment banking research firm.
The best-performing newly public Internet companies, according to CommScan, include Liberate
Technologies Inc. and Akamai Technologies Inc., up 866 percent and 612 percent, respectively.
Liberate makes software to connect telephones and other devices to the Internet, and Akamai's
software speeds Web- page delivery.
More IPOs
Wall Street can expect a continuing stream of infrastructure companies to begin selling shares to the
public, said Paul Cook, who runs the $2.5 billion Munder Net Net Fund.
''There are momentum factors out there that propel the business prospects of these companies,'' he
said. ''There are some very interesting companies that are coming public soon.''
Electronic retailers may not be able to keep up with companies that build up and improve the
efficiency of the Internet itself, Cook said.
Investors ''should be careful with regard to e-commerce and e-tailers -- they have to work out some
profitability issues.'' Cook, who holds Amazon, said he's gotten ''a bit impatient'' with the company,
which has never made money and continues to expand through acquisitions.
Still, Amazon.com and eToys Inc. should benefit from the approaching holiday season, analysts
said. U.S. holiday sales on the Internet are expected to increase almost fourfold to as much as $15
billion from between $3 billion and $4 billion last year, as more customers shop on a broader range of
Web sites, an Ernst & Young LLP survey found.
Not All Roses
Internet IPOs aren't all rosy -- more than 14 percent of companies that have sold shares to the public
since July have slipped below their offering price.
''The hope is, one thing going up 25 times will make up for the several that don't,'' said Amerindo's
Vilar of the craze for Internet IPOs.
Vilar holds Sycamore, Amazon.com and Kana Communications Inc., which has returned 966 percent
since its September IPO and makes software to manage large volumes of e-mail.
Many Internet companies, both infrastructure firms and retailers, are going public now because of a
need for quick cash. That's a change from the past, when new companies would remain private for a
while, concentrating on building the business from within, said the Internet Fund's Tuen.
''The competition is so fierce that quick access to capital is essential, because they're spending
money like water,'' Tuen said. ''The mindset now is, 'spend money now, worry about the
consequences later.'''
''One of the things that helped Internet companies early on was the lack of available shares,'' he said.
''We still have demand, but if we continue on this pace, there will be so many choices for investors
that it will collapse.''
The renewed interest in Internet shares is evident in several indexes that track the shares and show
them near or above their April peak.
The Inter@ctive Week Internet Index, with 50 members, is 24 percent above its April high,
theStreet.com's 20-member DOT index is 17 percent above its April peak and the 183-member
Bloomberg Internet Index is 4.4 percent below.
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