| BUSINESSWEEK ONLINE : DECEMBER 27, 1999 ISSUE | ||||||||
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| WHERE TO INVEST -- STRATEGIES FOR STOCKS
A Coming of Age for Dot.Coms Revenues will rise--and there will be less red ink Internet mania paid off big time for investors in 1999, and incredibly, the dot.coms have more room to run in 2000. Despite a prolonged midyear sell-off that ran from April to August, Internet stocks are up an incredible 154% this year through Dec. 10, as measured by the Dow Jones Internet Composite Index of 40 stocks. Investment pros doubt that Net stocks can repeat this kind of performance next year. Still, they see huge growth ahead for the Internet and believe that Net stocks will continue their drive north. ''This is a turbocharged industry, and what you see in the next 12 months will dazzle and amaze you,'' predicts Alberto W. Vilar, manager of the Amerindo Technology Fund, Net-heavy and up 211% through Dec. 10. BUMPER CROP. Indeed, key signposts are pointing in favor of the dot.com crowd in the next year. Revenue growth, not profits, is a widely used measure of Internet companies' prospects. And of 250 Internet stocks tracked by I/B/E/S Inc., an earnings research firm, sales are expected to jump 45.9%. What's more, the bottom lines of Net companies will get less red: Their losses are expected to drop 60% next year, to $1.1 billion, down from $2.1 billion in 1999. And there's a bumper crop of new issues ready to go public in 2000, certainly keeping the sector in the headlines. Investors are hoping there will be more companies like this year's big winners, including Phone.com Inc. (PHCM), up 1738%, and Commerce One Inc. (CMRC), up 1921% year-to-date. ''The big story right now is the staggering number of IPOs...and there will be great values in a lot of these smaller companies,'' says Ryan Jacob, manager of the Jacob Internet Fund. Although the overall outlook is bright, Internet investing still holds enormous risks for investors. The Net is becoming increasingly crowded, and marginal players are getting passed over for their flashier brethren. Indeed, more than a hundred Internet stocks are trading below their IPO price, says Cathy Baker, senior manager of the RS Internet Age Fund. At the same time, many Net stocks are trading far above traditional valuation norms, and many investment pros think they carry exceptional risk. For instance, Yahoo! Inc. (YHOO), which was just added to the Standard & Poor's 500-stock index, and America Online Inc. (AOL) are trading at 4785 and 273 times forward earnings, respectively. ''This part of the market look like a national video lottery game,'' says Garrett R. Van Wagoner, whose aggressive growth funds posted huge gains from Internet stocks this year. Another caveat: Some tech-fund managers expect another seasonal slowdown in the spring for technology stocks and Internet shares in particular. Some also worry about carnage in overcrowded markets such as e-tailing. Indeed, smaller players--in particular e-tailers--won't attract enough traffic to turn a profit or will be pushed out by traditional companies moving online. And there are fears that a sell-off could be triggered by an interest-rate hike or disappointing announcements by bellwether Internet companies. But despite these worries, there are some worthy individual Net stocks to be found. And there are even bargains among the dot.coms, investment pros say. They recommend smaller Internet plays in niche markets such as online media companies, select e-tailers, Web consultants, and Internet infrastructure companies. FIND A NICHE. Likely media-company bargains are iVillage Inc. (IVIL) and MarketWatch.com Inc. (MKTW), says Jacob. IVillage, an NBC company, is a Web site for women that features relationship, parenting, and health advice, among other things. MarketWatch.com, jointly owned by CBS (CBS) and Data Broadcasting Corp. (DBCC), delivers daily financial news. Jacob thinks these companies will become leaders in their markets because they are backed by powerful media companies. Both command premium advertising rates, and their revenue growth stands to more than double next year, though they probably won't post profits. Both companies recently traded far below their highs of earlier this year. Van Wagoner likes two niche e-tailing stocks: Garden.com Inc. (GDEN) and SmarterKids.com Inc. (SKDS) Both companies are targeting affluent customers in their respective markets of gardening and educational children's toys. While Van Wagoner says both companies ''won't make any money as far as the eye can see,'' he thinks their favorable demographics will rapidly accelerate revenues. And with stock prices close to, or below, their IPO price, they're cheap, he adds. Some other hot Internet stocks are companies helping businesses expand on the Net. One of Baker's top picks is Cysive (CYSV), which builds e-business systems for companies such as Cisco Systems (CSCO) and DaimlerChrysler (DCX). Thanks to strong demand for Cysive's services, revenues should nearly double next year, to $48 million, Baker says. Recently trading at $55 a share--or at 20 times expected 2000 revenue--Cysive is reasonably priced compared with some Net stocks that are trading at sky-high price-to-sales multiples. Another promising play is CAIS Internet Inc., says Alexander C. Cheung, manager of the Monument Internet fund. The company provides high-speed Internet access to hotels and apartment buildings. A recent price of 15 is below its May IPO price of 19. Cheung thinks it's a bargain because of a rapidly expanding customer base, and sales are expected to jump to $44 million next year, from $9 million in 1999. Even though losses should nearly double next year, Cheung thinks CAIS will break even by the end of 2001. NIX THE ''FAB FOUR.'' Two other dot.com plays are GetThere.com (GTHR) and Rowe.com (ROWE), says Andrew L. Beja, a portfolio manager who tracks Internet stocks for Standish, Ayer & Wood, a Boston money manager. GetThere sells Internet-based travel services to companies. Rowe.Com provides a unique purchasing system allowing some 20,000 companies and universities to buy magazines, newspapers, and books over the Net. Beja says both companies are cheap relative to their growth prospects. Most investment pros say to stay away from the pricey ''fab four''--Yahoo! (YHOO), AOL (AOL), Amazon.com Inc. (AMZN), and eBay Inc. (EBAY)--unless they get cheaper. But some Net investors aren't shy about recommending stocks with stratospheric prices. It all depends on the quality and prospects of the company. For instance, Paul T. Cook, manager of the $5 billion Munder NetNet Fund, is still high on InfoSpace.com Inc., up 729% this year, to 158 in early December. The company supplies information to Web sites and wireless devices such as cell phones. It's worth the high price tag because it has a huge opportunity in wireless devices and its financial performance is far better than Wall Street analysts thought, says Cook. In the first nine months of this year, Infospace's sales jumped to $22 million, from $5 million. Third-quarter profits were $1.3 million instead of an expected loss. Investing in companies such as Infospace is a scary proposition on the heels of huge price gains and analysts' forecasts of continued losses next year. But if you choose stocks wisely, it can pay to invest in the Net. While the risks can be high, the potential returns may be even greater. Some advice: Spread your bets, invest in companies with rapidly growing revenues and profit potential, and brace yourself for some dizzying falls along the way. By GEOFFREY SMITH _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS A Coming of Age for Dot.Coms TABLE: The Cream of the Crop For the Record: Cathy Baker Best Bet: Think Small INTERACT E-Mail to Business Week Online | |||
