Internet Could Affect Mkt As Much As PCs Did In '80s [ASND]
[Found a reference made to Ascend in this article]
By DUNSTAN PRIAL
Dow Jones Newswires
NEW YORK -- The Internet has the potential to have as much impact on U.S.
public equity markets this decade as personal computers did in the 1980s.
That is the conclusion reached by respected Morgan Stanley Dean Witter
technology analyst Mary Meeker in the fourth edition of the Morgan Stanley
Global Technology Team's IPO Yearbook.
"We maintain ... that potential wealth creation related to the Internet could
exceed that created by the PC in the 1980s," the report states.
Information technology spending by U.S. companies has spiked twice since
1980, according to the report. First in 1981 with the introduction of the personal
computer, and again in 1995 with the advent of the commercial Internet.
The computer revolution in the 1980s spawned massive investment in new
technologies, and the Internet revolution of the 1990s is expected to do the
same.
Initial public offerings by Internet-related companies have generated some of
the biggest headlines and highest premiums of any sector this decade. Several
flashy Internet deals have added a lift to an otherwise sleepy 1998 IPO market.
The Morgan Stanley report asserts that the evolution of the Internet sector in
the wake of the explosive growth of Internet traffic this decade closely mirrors
the proliferation of PC-related companies in the early and mid-1980s.
The impact on U.S. equities markets occurs when companies in nascent
industries start looking to raise money through public offerings. It occurred on
a massive scale in the 1980s and is expected to happen again.
IPO watchers say comparisons between the Internet and PC industries are
justified.
Scott Sipprelle, founder of Midtown Research Group, an IPO research and
investment firm, said one difference is that the Internet sector has the potential
to remain heated for a lot longer than the PC sector did a decade ago.
"The Internet window isn't going to close like the PC window did. The
euphoria may die down, but the businesses that come off the Internet will have
longer tails" than those within the PC sector, Sipprelle said.
Internet stocks cooled off a bit in 1997 after an initial surge provided by the
debuts in 1995 and 1996 respectively of Netscape Communications Corp.
(NSCP) and Yahoo! Inc. (YHOO).
According to the Morgan Stanley report, in February of 1997, half of the 42
Internet stocks that debuted after Netscape were selling below their offering
prices. But 14 months later, things had turned around, and 65% of the 68
Internet companies that followed Netscape were trading above their offering
prices by April 1998.
And through the first quarter of 1998, Internet deals have been the hottest
sector for IPOs, producing three of the top five deals in terms of market value
appreciation, according to Morgan Stanley's analysis.
Analyst Meeker said in an interview with Dow Jones that she expects growth
within the Internet sector to closely follow the pattern established a
decade-and-a-half ago by the PC industry.
She predicted that a handful of the myriad new Internet companies will
become household names and make early shareholders rich, following the
paths forged in the 1980s by Compaq Computer Corp. (CPQ) and Microsoft
Corp. (MSFT). Many other companies will fall by the wayside, however, as an
exclusive group of leaders emerges in each of the Internet's various niche
sectors.
Money managers familiar with technology agreed that a paring down of the
sector is inevitable.
Scott Black, president of Delphi Management Inc., said the euphoria that
currently greets many Internet stocks is unwarranted. Investors are adhering
to "the greater fool theory," he said, which states that someone will always pay
more than you did for an ostensibly hot stock.
"People are buying a concept that the Internet is the wave of the future. But no
one has figured out yet how to make money on the Internet," said Black, a
self-proclaimed value investor.
Meeker was more optimistic. In her report, she concurs with legendary Silicon
Valley venture capitalist John Doerr's view that the personal computer
industry created more wealth than any other past effort in history. Only
Meeker believes the Internet may outdo the PC.
Morgan Stanley's Meeker noted the numerous parallels between the
development of the two industries. For example, the earliest companies in both
nascent industries focused on hardware products. The focus then shifted to
software that made the hardware run more efficiently.
Specifically, Compaq Computer Corp. (CPQ), a hardware company, debuted
in 1983, followed by software companies Microsoft Corp. (MSFT) and Sun
Microsystems Inc. (SUNW), both in 1986.
In the Internet industry, Ascend Communications Inc. (ASND), which makes
Internet infrastructure hardware products, debuted in May 1994. Netscape, an
Internet software company, debuted the following year, and Yahoo! Inc.
(YHOO) a year after that.
Meeker said the next wave of Internet companies will come from two areas;
Internet commerce companies, such as on-line book seller Amazon.com Inc.
(AMZN), and companies that make software that helps businesses use the
Internet.
While the two industries' evolution stages are similar, the analyst said the
evolution cycle for Internet companies is progressing much faster than that of
the PC industry.
In fact, in Meeker's opinion, the Internet industry has evolved faster and is
responsible for more fundamental changes in the way business is conducted
than any other industry in history.
The rapid pace of that evolution means that consolidation among market
leaders will probably occur more quickly than it did in the PC industry, she said.
Meeker cited Yahoo!'s rapid two-year ascent to the $5 billion market
capitalization level. Not even Microsoft can claim to match that type of growth,
she said.
"Internet companies are growing up faster than we've ever seen in any other
industry," Meeker said.
In addition, the growth rate in the number of Internet users has far outpaced
the growth of PC users a decade ago, according to Meeker. Commercial
Internet users grew to 55 million between 1995 and 1997, she said. It took nine
years - from 1981 to 1990 - for the same number of people to buy PCs.
Moreover, the Internet's potential is vast. "How many people can access the
Internet?" Meeker asked. "I don't know. But it's huge."
-Dunstan Prial; 201-938-5354 |
