No one doubts the Internet will one day be a highly
profitable enterprise for a number of upstart companies. The question is, which
companies will exploit the most lucrative areas?
For Internet-related companies, the beauty of this open-ended question is
that IPO investors are acting primarily on potential rather than concerning
themselves with specifics, such as past earnings.
"Obviously there is euphoria and a fair degree of speculative excess," said
Dick Smith, syndicate desk manager for NationsBanc Montgomery Securities Inc.
in San Francisco.
Since the beginning of the year, almost any deal even remotely connected to
the Internet has exploded.
Consider last week's smashing debut of Broadcom Corp. (BRCM), an Irvine,
Calif.-based maker of digital chips that speed access to the Internet. Its
shares, priced late Thursday at $24, traded recently at $55.25, a 130% premium.
And Broadcom's newly public Internet-related cousins are doing equally well.
They include Internet security companies VeriSign Inc. (VRSN) and ISS Group
Inc. (ISSX), software maker Exodus Communications Inc. (EXDS), Internet
advertising firm DoubleClick Inc. (DCLK) and music retailer CDnow Inc. (CDNW),
each trading at twice or more its initial offering price.
Investors might be forgiven their enthusiasm, given the Internet's potential
for growth, said Smith, citing a recent U.S. Commerce Department report that
estimated Internet traffic doubles every 100 days.
Smith said he isn't concerned about the sector as a whole. What will matter
to investors, he said, is which companies have the best ideas and the most
profitable method for employing them.
On-line commerce is the area most analysts cite when attempting to pinpoint
exactly where Internet use will gain critical mass.
"The Internet is really about two things: commerce and content," said Steve
Harmon, senior investment analyst at Mecklermedia Corp.'s (MECK) Internet Stock
Report. "Without something to buy, why be there?"
Harmon said the two-year-old Mecklermedia Internet Stock Index, or ISDEX,
has risen 80% since January, and two of its most recent additions, CDNow and
DoubleClick, are directly related to Internet commerce.
All new Internet stocks "have a heck of a lot of expectations to fulfill,
and that's not necessarily a good thing," according to Harmon.
The high expectations have clearly driven the prices of these stocks through
the roof, which has helped some investors make a lot of money. But if the
companies don't live up to those expectations, the stocks will nose-dive,
leaving retail investors with serious losses and fund managers with a lot of
explaining to do.
On the other hand, the companies may meet those expectations. "And if they
do, it's onward and upward," Harmon said.
Because of the uncertainty surrounding the future of the Internet, no one
can say whether the current euphoria is warranted or when the frenzied
speculation will end.
Tom Taulli, research director for IPO Monitor.com in Los Angeles, said
Broadcom's phenomenal opening day surge and continued strength in the
aftermarket is no sign that Internet IPOs have peaked.
Taulli noted that the growth potential for Internet stocks is "exponential"
but highly speculative.
The next big Internet IPO on the horizon appears to be Inktomi Corp. Late
last year, analysts cited the San Mateo, Calif., maker of network software as
one of a handful of companies with revenue growth strong enough to make for an
attractive IPO in 1998 - and that was before Internet deals took off.
For the six months ended March 31, the company reported revenue of $5.9
million, more than twice the $2.3 million of a year earlier.
But like many of its Internet peers, Inktomi has yet to turn a profit.
The company filed on April 16 to sell 2.2 million shares at an estimated
price of between $12 and $14. It will sell two million of those shares itself,
with existing shareholders offering the remaining 200,000. Goldman Sachs & Co.
is lead underwriter.
"I think it could be big," said Mecklermedia's Harmon. "Its goal is the same
as Broadcom's - let's make the Internet faster. Broadcom wants to do it using
chips and Inktomi using software."
Analysts are predicting Inktomi will try to complete its deal as quickly as
possible, while the window of opportunity is still open wide.
- Dunstan Prial; 201-938-5354
Copyright (c) 1998 Dow Jones & Company, Inc. |
