BW ONLINE DAILY BRIEFING

STREET WISE by Sam Jaffe	September 20, 1999

The 1990s have been the decade of the Internet, which in less than five years has crept into every crevice of our lives. The Web's rapid growth underpins the idea that any quality Net stock is worth almost any price: If traffic to the Net triples every year, the theory goes, so should the revenues of even half-decent dot.coms.

Recently, some experts have started questioning that if. "It's basic mathematics," reasons Alexander Cheung, the manager of the Monument Internet fund (MFITX). "When you start from a small user base and experience massive growth, the percentage gains have got to slow down." If he's right, some Net stocks are wildly overvalued.

A hard look at the numbers, though, shows that the Net's growth spurt isn't over yet -- and in fact may have just begun.

MODEST UPSIDE? The argument that Net growth is playing out is based on simplistic assumptions about Web usage. For instance, a common assumption is that 40% to 60% of the U.S. population uses the Net -- implying that the Web's upside traffic potential is modest. But the important measure isn't so much the number of Web visitors, rather how much time they spend online -- and how they use that time.

Someone who's looking for free nudie pictures isn't worth much to an advertiser or merchant, but someone who's looking for news or a sweater or tax advice is a precious commodity -- and will become more so as technology improvements make Web surfing more useful and entertaining. "As broadband access becomes pervasive, the amount of time people spend online and what they do there will become more important," says Merrill Lynch analyst Henry Blodget.

So how do you get a handle on that trend? One way is to look at the spread of broadband access. About 2% of Internet visitors have cable modem or DSL access, according to researcher Jupiter Communications. That number could reach 5% by the end of this year and will probably at least double next year. Five years from now, the majority of U.S. households will be logging on over high-speed connections. This means features such as full-motion video and graphics will become the norm -- and draw a big audience.

HOMEBODIES. Another trend to watch is the number of wired households. Right now, much of the Web audience logs on from work. But experts say Web shoppers are more likely to buy from home, where Web hookups aren't yet pervasive. According to Forrester Research, 33% of U.S. households are online, a figure it expects to reach 38% by the end of this year and 56% by 2003.

By then, the number of Web buyers should be up as well. Indeed, a recent poll of 5,800 Web users by Harris Interactive shows that 33% expect to make an online purchase this year, up from 8% last year. Thus this Christmas season could be a launchpad for many e-merchants. Ashok Kumar, a managing director of Piper Jaffray in Minneapolis, expects fourth-quarter online sales to quadruple this year vs. 1998's fourth quarter. Forrester is less optimistic, expecting only a doubling from last year's fourth-quarter total of $3.5 billion.

Don't forget, too, that the Internet isn't just a U.S. phenomenon anymore. "By far the greatest opportunity for future growth of established Web companies is overseas," says Nicole Schmidt, an analyst with Josephthal & Co. Fewer than half of all Europeans have even seen the Net, much less use it regularly. And Asia and Latin America lag even further behind Europe, partly because of high telecommunications charges. Already, though, legislators in Japan are trying to change that, and the Web itself is coming up with solutions such as free access from Internet service providers that split their e-commerce profits with phone companies.

CHINESE SHOCKER. This gives investors many ways to buy into this future growth. One might be Advanced Micro Devices (AMD), which will supply many of the chips that power the cheap PCs new Web surfers will use. Unlike most pure-play Net stocks, AMD is cheap: Its market capitalization is roughly equal to its annual revenues. Compare that to eBay, whose market cap is more than a hundred times its annual revenue.

Getting in on overseas growth is harder, since the market is still embryonic. Investors in Chinese ISPs, for instance, were shocked to hear a top government official announce last week that no foreigners would be allowed to invest in Chinese Internet companies. A more stable play might be Freeserve (FREE), which provides free access to Europeans in exchange for a share of e-commerce dollars. Freeserve is the leading ISP in Europe, though it's still a risky bet since its business model is unproven, and it's still years away from profitability.

Another way to play overseas growth is via the ad angle, says Monument fund manager Cheung. He recommends ad software-and-serving companies DoubleClick (DCLK) and 24/7 (TFSM), both of which are expanding rapidly in Europe and Asia. "The next wave of growth will come from overseas," declares Cheung. He likes the advertising companies because "they're firing on all cylinders over there." Add up what's happening "over there" with what's happening here, and you can see that the Net is hardly out of its toddler stage, never mind mature.

Jaffe writes about the markets for Business Week Online _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

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