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Internet IPOs back in favor

Growing awareness of the Net is helping to push IPOs in the sector to new heights and recapture the IPO momentum that was lost this fall.

4 min read
Growing awareness of the Internet is helping to push initial public offerings in the sector to new heights despite volatile markets, recapturing the IPO momentum that was lost this fall.

Increasingly, mainstream investors are realizing that Internet companies aren't about esoteric technologies, but rather are about products and services that are likely to become highly profitable as the Web becomes more and more a part of everyday life, analysts agreed.

Today, Web advertising firm DoubleClick placed an additional 2.5 million shares of its common stock on the market, Virtual Wall Street hoping to catch the Net IPO wave of recent weeks. Earlier this week, online community Xoom.com saw its stock surge 145 percent on its first day of trading, and last week both uBid and Ticketmaster Online-CitySearch burst the seams on their newly public stocks, tripling their share prices on their first outings.

The IPO market of today lies in stark contrast to the icy environment of even a few months ago, when a number of Internet companies canceled their IPOs citing market conditions. Among those to get cold feet were CitySearch, TheGlobe.com, and EarthWeb.

"All of a sudden the light bulbs have gone on in the minds of the average investor," said Phil Leigh, an Internet analyst at holding company Raymond James Financial. "In the past six months, there's been a dawning in the conscience of this investor that the Internet is a prototype of some future electronic media that is likely to become a dominant media."

Investors don't want to miss that train, and many are rushing to leap onto it from the moment it leaves the station. But such enthusiasm has pumped first-day trading levels to perhaps unrealistic heights. And because many Internet companies that go public are small, relatively few shares are put on the market--often leading to savage bidding wars.

"What you have is many investors chasing relatively small numbers of shares," said Linda Killian, a portfolio manager for Renaissance Capital IPO Fund. "So it's less of a pricing and valuation issue than one of supply and demand."

Lawrence York, lead portfolio manager at www.Internetfund, a mutual fund that focuses on Web stocks, agreed, noting that many of the soaring Internet issues are not even reflective of "the great-to-come."

"People are becoming familiar with the Internet, but I think it is totally misunderstood at this juncture in time," York said. "The focus is largely on hawking goods over the Net, but the promise is much larger than is imagined at the moment."

While most investors are focusing on Web communities and "e-tailers," he added, the Internet is really more about the adaptation of a new global information, communication, and distribution system.

Currently, analysts divide the Internet industry into two distinct sectors: e-tailers like wildly successful book and music vendor Amazon.com, and new media companies like giant America Online. Raymond James's Leigh predicted that the inevitable convergence of these sectors is likely to push Internet stocks even higher going forward.

"If these companies are not just media companies but also retailers, you will have advertising revenue as well as retailing revenue," Leigh said. "And if retailing moves into cyberspace, as many studies indicate, all these stocks could be substantially undervalued and new IPOs will continue to follow the Internet sector higher."

But not all analysts are so rosy about the apparent resurgence of the Internet IPO.

"Investor enthusiasm is likely to become rational exuberance," said David Menlow, president of the IPO Financial Network. "What will hurt the Internet market is the prospect of bringing more of these companies public in the first few quarters of 1999."

To back up that theory, Menlow pointed to several previously hot IPO markets that ultimately turned cold, such as real estate trusts.

"At some point, there is an over-saturation and the sector goes to sleep," he warned. "People will abandon their positions like rats jumping from a ship as they see the opening premiums falling lower and lower with each IPO."

Already, the swell in investor interest has forced some online trading services to curtail trading activity on hot Net stocks.

Charles Schwab, the largest online trading service, yesterday notified customers on its Web site that they will not be able to place trades online for several recent or pending IPOs. The notice said that these "securities have been removed from electronic trading due to expected volatility and fast-market conditions."

The company said it fears those conditions could result in price quotes that are significantly different from current trading prices and cause delays in order executions.

Nevertheless, most analysts say that, for the moment at least, both specialized Internet mutual funds and individual investors will continue to lap up Net IPOs, action that is hard to dissuade as prices on the stocks continue to skyrocket.