Technology

Five Net Names to Watch in '05


By Scott Kessler It has been almost five years since the dot-com bubble burst, and up until relatively recently, few entrants in the Internet segment have proven to be durable. Sure, interest rates have been at generational lows, but not surprisingly, capital has been hard to come by for companies in a sector that lost some 86% of its value (as measured by TheStreet.com Internet Index) from Mar. 10, 2000, to Valentine's Day 2005. Wow. Didn't Internet stocks rally at some point?

These companies laid off hundreds of thousands of people. Nearly a thousand online outfits went out of business. Hundreds of billions of dollars were lost. Web developers went back to their old jobs. One-time online ad salespeople started selling other things. Former executives wrote books. The lifeblood of innovation -- people and capital -- turned away in pursuit of safer, long-term strategies. And consolidation thrived. The big got bigger (relatively speaking), and the small disappeared.

Now, that has all changed. It took the better part of five years, but people are again excited about Internet companies. Last year, Google (GOOG

: S&P investment rank 4 STARS, buy; recent price: $195) completed one of the largest IPOs ever, and its shares still doubled in fewer than 50 trading days. Google's 2004 share appreciation was bested by two Chinese IPOs (51job and Shanda Interactive). There were 19 online-company IPOs last year, making the Internet the third-most active sector, according to Red Herring.

BEYOND THE GIANTS. Over the past 12 months, Internet venture-capital investments have been notable -- just look at eharmony, Fastclick, TechTarget.com, and Webroot Software, which each raised $70 million or more. These were among the largest financings of any private companies over the last year.

Nonetheless, people seem to want to talk about only the industry's giants, such as eBay (EBAY

; 3 STARS, hold; $85), Google, and Yahoo (YHOO

; 4 STARS; $34). They're each worth between $40 billion and $60 billion.

However, given improving investor sentiment and resurgent industry innovation, I'm starting to think more about some emerging Net companies. Below are some brief comments on five private outfits to watch in 2005:

ChannelAdvisor provides technology and services that enable large companies, small businesses, and individuals to use online marketplaces to win customers and maximize inventory yield. Essentially, it strives to help make online sellers more effective and efficient. As companies contemplate their "eBay Strategies" and how to best use the Internet as a sales channel, those providing such services may find an opportunity, particularly with large enterprises.

iSold It is one of many eBay drop-off store concepts sprouting up around the country. People who don't want to spend the time or put in the effort selling items on eBay can bring them into an iSold It store. iSold It will set up auctions, interact with buyers, ship merchandise, and, if a sale is made, pay sellers (via check minus fees). With some 90% of eBay users never having sold a thing, I think a lot of aspiring sellers out there who may be in need of assistance. The drop-off store concept may have a bright future. Other participants in this segment include AuctionDrop, NuMarkets, QuikDrop, and Snappy Auctions.

Mozilla Foundation is the developer of one of the Internet's most popular software programs, the Firefox browser. Mozilla claims Firefox is faster, safer, and more efficient than competing products (including, of course, Microsoft's Internet Explorer). With 20 million users and material market-share gains, Firefox is garnering significant attention.

In January, 2005, its lead engineer and one of its Web developers were hired by Google. Both indicated they expect to continue to be very much involved with Mozilla, which describes itself as an open-source community of developers and testers. In February, 2005, Yahoo introduced a version of its toolbar for the Firefox browser.

SideStep is an Internet travel search company. SideStep is designed to enable users to concurrently search a variety of Web sites to find the best travel deals. Its searches include online travel agency and travel supplier (airline, hotel, and rental car) sites. With Internet users often going to several Web sites to find what they're looking for and compare prices, I think that so-called "meta-search" companies will become increasingly popular. Additional players in this segment include FareChase, Kayak Software, Mobissimo, and QIXO.

Weblogs Inc. is the purveyor of a network of more than 70 blogs, which it characterizes as the world's largest. The company is dedicated to creating trade blogs across industries in which user participation is an essential component of the resulting product. Weblogs Inc. network categories include Consumer, Technology, Wireless, Video Games, Media & Entertainment, Business, Life Sciences, Personal, and Events.

I believe blogs will grow increasingly prominent, because they offer interesting and unique content, are easy to search and organize, and have the potential to generate notable revenues and profits through the use of online advertising (primarily keyword search) and affiliate marketing. Gawker Media is another major network of blogs.

I wouldn't be surprised to see companies such as these make news on the financing front in 2005, by possibly raising private capital or taking steps toward an IPO. I believe some of the businesses highlighted above have bright futures. We'll see if investors (private and public) agree.

Note: Scott Kessler has no stock ownership or financial interest in any of the companies in his coverage area. All of the views expressed accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed. Price charts and required disclosures for all STARS-ranked companies can be found at www.spsecurities.com

Required Disclosures

5-STARS (Strong Buy): Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in price on an absolute basis.

4-STARS (Buy): Total return is expected to outperform the total return of the S&P 500 Index, with shares rising in price on an absolute basis.

3-STARS (Hold): Total return is expected to closely approximate the total return of the S&P 500 Index, with shares generally rising in price on an absolute basis.

2-STARS (Sell): Total return is expected to underperform the total return of the S&P 500 Index and share price is not anticipated to show a gain.

1-STARS (Strong Sell): Total return is expected to underperform the total return of the S&P 500 Index by a wide margin, with shares falling in price on an absolute basis.

As of December 31, 2004, SPIAS and their U.S. research analysts have recommended 26.5% of issuers with buy recommendations, 61.3% with hold recommendations and 12.2% with sell recommendations.

All of the views expressed in this research report accurately reflect the research analysts' personal views regarding any and all of the subject securities or issuers. No part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

Additional information is available upon request to Standard & Poor's, 55 Water Street, New York, NY 10041.

Other Disclosures

This research report was prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"), and may have been provided to you either by: (i) Standard & Poor's under a license agreement with The McGraw-Hill Companies, Inc., which holds the copyright to this report; or (ii) a Standard & Poor's client who is granted a sub-license by Standard & Poor's. This equity research report and recommendations are performed separately from any other analytic activity of Standard & Poor's. Standard & Poor's equity research analysts have no access to non-public information received by other units of Standard & Poor's. Standard & Poor's does not trade in its own account. SPIAS is affiliated with various entities, which may perform services for companies covered by the recommendations in this report. Each such affiliate is operationally independent from SPIAS.

Disclaimers

This material is based upon information that we consider to be reliable, but neither SPIAS nor its affiliates warrant its completeness or accuracy, and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale so any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Analyst Kessler follows shares of Internet software and services companies for Standard & Poor's Equity Research Services


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