Dot-com firms still risky

Despite Google's huge success, Web sector remains volatile and no place for a nest egg

December 04, 2005|By KNIGHT RIDDER/TRIBUNE

A new generation of Internet companies is gaining currency and enticing investors again. Although remnants of the Internet mania of the late 1990s still litter the landscape, that debacle almost assures that today's cyber investor remains grounded in reality.

"All of us took more risks [in the late 1990s] than we should have," said Ryan Jacob, portfolio manager of the Jacob Internet fund. "Today, investors are much more scrutinizing, and it is a much more rational environment."

That's good because investing in dot-coms is not - and never should have been - for everybody.

The sector is volatile and no place for a retirement nest egg.

Although the number of Internet-related initial public offerings, or IPOs, is just a trickle, most financial experts predict plenty more to come. That forecast is based primarily on the fact that private venture capital firms are starting to pour money into Internet-related companies, and that is often a precursor for them going public.

"Finally, venture capital firms feel like they can make money again on these companies," said Michael Greeley, general partner at IDG Partners, a Boston venture capital firm. "There's a lot of enthusiasm for investing in these early-stage Internet companies."

One dazzling debut

The dazzling debut of Google Inc. last year provided the backdrop for the dot-com renewal and injected some much-needed excitement into the sector.

Google shares have soared from $85 when the company went public in August 2004 to almost $400 a share now.

"Google really has shined a bright light on this area," Greeley said.

But Google was a unique cultural and financial phenomenon. Only recently have investors considered the profit potential in other Internet companies.

Linda Killian, portfolio manager of the IPO-Plus Aftermarket fund, a mutual fund that buys shares in newly minted companies, said she's adding some Internet companies to her portfolio. "I have found a couple Internet companies I like," Killian said. "But I remain very wary of the space; I am extremely selective and I want to see profits in these companies."

Her fund now owns shares of WebMD Health Corp., which runs the health care portal WebMD.com. The company went public in late September at $17.50 a share and promptly rose to about $24, where it currently trades.

WebMD is a well-managed company, profitable and a leader in its niche, financial experts said. These traits were lacking in many of the first-generation Internet companies.

"There's a lot of substance to this company," Killian said. "Most of the revenue comes from companies looking for an effective way to target-advertise."

Someone who clicks on WebMD for information about a particular disease will also see ads from pharmaceutical companies selling drugs to treat it. Traffic on the site has increased 41 percent in the past three years.

So far this year, only four out of the 158 IPOs have been Internet-related companies, according to Renaissance Capital's IPOhome.com. But there are at least that many more in the IPO pipeline. (The financial services industry produced 28 IPOs, the most of any sector.)

One of the hottest Internet sectors and the area where more public companies may emerge involves "user-generated" Web sites, such as MySpace.com and TheFaceBook.com, Jacob said.

These sites allow young people - particularly college students - to post personal information and keep in touch with friends.

In fact, even traditional media companies are buying these types of Internet companies. For example, this year media giant News Corp. bought Intermix, which owned MySpace.

"The big media companies kind of abandoned their Internet efforts a few years ago, but they are ramping up now," Jacob said. "News Corp. is shooting for that younger demographic."

Dow Jones & Co. and the New York Times Co. also purchased Internet companies this year to beef up their cyber traffic, he said. Interestingly, some of the most promising Internet companies are being picked off by larger companies even before they can go public.

The best example of that was the News Corp. purchase of IGN Entertainment Inc., which provides games and other data for mobile devices, after IGN had announced it would go public. "These larger media companies are nervous," Jacob said. "They understand the strategic importance of the Internet."

Some IPO swoons

Although shares of WebMD, Google and a few others have done well, there have been some notable Internet IPO swoons this year. In fact, the stock price behavior earlier this year of Baidu.com Inc. was reminiscent of the silliness of the late 1990s.

Baidu, a Beijing Internet search engine, mesmerized Wall Street with its chest-pounding comparisons to Google. Its shares skyrocketed from $27 to $122 during the first day of trading Aug. 5 - one of the biggest one-day gains ever.

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