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BUSINESSWEEK ONLINE: Business Week ebiz | ||||||||||||||||||||
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It May Be Too Soon to Sample Overseas Net Stocks The China.com and FreeServe nosedives show that the Internet industry abroad is still very young and volatile The case for investing in non-U.S. Internet stocks is pretty simple. In a nutshell, investors expect that what happened over here will eventually happen over there: Internet usage will explode, e-commerce will grow, and tiny startups with huge losses will quickly build billion-dollar market caps. That hasn't quite happened yet: Two of the most prominent overseas Internet names available to U.S. investors, British Internet service provider FreeServe (FREE) and Chinese-language portal China.com (CHINA), in recent weeks have both fallen about 40% from their post-IPO highs.
The problem with the current crop of foreign Internet stocks is just that it's very early in the development of this new industry. Many investors peg the international scene at about three to five years behind the U.S. -- even further behind for Latin America and other less developed regions. The eBay or Amazon.com of Europe or Asia may not even be publicly traded yet. "It is significant that there have been a couple" of new Internet stocks that trade on American exchanges, says Andersen, "but they are still the exception." In Europe, the current universe of 44 Internet stocks has a combined market cap of only $17 billion, says Peter Bradshaw, Merrill Lynch's European Internet analyst. He expects that number to grow to $50 billion by June of next year, lifted by a new batch of Web-related spin-offs from large telecom and media companies. NO "RERUN." There are bound to be unanticipated hurdles in the development of an international Internet industry, however. Although growth trends overseas may parallel those in the U.S., the Web is sure to develop very differently in other countries. "We do not accept the thesis that what is happening in the Internet in Europe is merely a rerun of the U.S. minus two years," Bradshaw wrote in a recent report. Most obviously, Asia and Europe are far from homogeneous regions. For example, to reach 70% of the population of Europe a site would have to publish content in five languages, says Bradshaw. For the Internet industry outside the U.S. to grow as fast as it did in America, the rest of the world would likely have to adopt the U.S. approach to marketing, something that may not happen right away. In a recent report, Evan Neufeld, Jupiter Communications' vice-president for international research, chastised European Web companies for not doing more with the customers they've acquired. Europe is full of opportunity, he says. "However, the continued development of Europe's Internet economy is far from assured unless Web ventures establish increasingly more meaningful, high-value relationships with European consumers." Investors who jumped into some of the new offshore Internet stocks now trading in the U.S. have learned in recent weeks just how early they are. Bid up to huge prices largely on post-IPO hype, these highly speculative stocks have plunged in the wake of an overall rockiness in U.S. markets and some troubling dynamics in their own industries back home.
Not all the movement in stock prices has been downward, however. Shares of Japanese ISP Internet Initiative Japan (IIJI) rose 41% on Oct. 20, to close at 54. Fueling the liftoff were comments from Morgan Stanley Dean Witter echoing management's recent announcement that revenues were likely to grow 100% year-over-year when fiscal second-quarter results are reported in November. However, the stock is still down substantially from its September high of 91 15/16. CANADIAN SPIN-OFF. These stocks have been particularly volatile in part because they are listed on U.S. exchanges. Sharon has avoided them in favor of investing in companies listed on local exchanges. Not only are stocks of locally listed companies less volatile but their valuations are lower, he says. Most of his picks are in software, consulting, and Web hosting stocks, which can benefit from the early growth of the Internet. Sharon, like Merrill's Bradshaw, thinks that more large companies will be spinning off Internet divisions in the months to come, which could make for exciting stock plays. Already, he owns Chapters Online, which was spun off just a few weeks ago from Chapters, the largest bookstore in Canada. He also holds Fujitsu, which has the largest ISP in Japan.
For now, stockpickers can get plenty of international exposure by investing in America Online (AOL), Yahoo! (YHOO), and Amazon.com (AMZN), all of which are expanding aggressively overseas, says Bradshaw. Many investors are also buying some European companies that are expanding into the Internet and have American depositary receipts listed in the U.S. Nichols says that water company Vivendi (VVDIY) and luxury products company LVMH Moet Hennessy Louis Vuitton (LVMHY) are two of his favorites. There are plenty of ways for creative investors to play the growth of an international Internet. But for most folks, the safest strategy may be to watch and wait for these fledgling markets to develop a bit more. Amey Stone is an associate editor at Business Week Online _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ |
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 Amey Stone covers the markets and investing for Business Week Online WEB POINTERS To visit some of the sites mentioned in the story, click here: FreeServe China.com Warburg Pincus Driehaus Capital Merrill Lynch Jupiter Communications AOL/UK Morgan Stanley Dean Witter Chapters Fujitsu Morningstar Softbank T. Rowe Price Janus Yahoo Vivendi LVMH | |||||||||||||||
