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HolidayBuyer's Guide
Tech Industry

Net services firms shine on Wall Street

The pack of firms that went public during the first half of the year are quickly hopping on Wall Street analysts' coverage lists.

The pack of Internet services firms that went public during the first half of the year are quickly hopping on Wall Street analysts' coverage lists.

Included on the growing "A" list are Viant, Scient, iXL, Razorfish, U.S. Interactive, Proxicom, and AppNet Systems--small companies that are growing at an atomic clip. These companies were backed by impressive venture capital firms in their early days and now are trumpeted by the likes of Hambrecht & Quist, Morgan Stanley Dean Witter, and others.

Overall, the nascent services companies are trading at double or triple their IPO price, with their values increasing between a high of 220 percent (Scient) to a low of 121 percent (U.S. Interactive) since they went public.

The Internet services boom comes at a time when business for older, more traditional systems integrators--such as Cambridge Technology Partners and EDS--and back-office software makers such as SAP and PeopleSoft are creeping along, struggling with the transition to the Internet or a slowdown in license sales. Meanwhile, Internet companies are scrambling to hire employees to staff marketing, procurement, branding, and self-service projects for customers, as the size and scope of demand increases.

Hot upstarts that analysts are speculating could go public soon include privately-held Zefer, Lante, and Breakaway Solutions. In the meantime, older Internet services firms such as USWeb/CKS and Sapient continue to impress Wall Street. In the September quarter, Internet services stocks rose 21 percent compared to 3 percent for the NASDAQ composite, according to Morgan Stanley Dean Witter, which backed Scient's IPO.

Soaring stock
Company IPO price Current price
AppNet $12 $26
iXL $12 $33.25
Razorfish $16 $47 7/8
Viant $16 $48
Scient $20 $67 7/8
USinteractive $10 $20.75
Proxicom $13 $51 1/8
"If you mix professional services with the Internet, the type of growth you get is explosive," said Danny Rimer, a financial analyst at Hambrecht & Quist, which helped take Scient public earlier this year. "Fundamentally, the Internet is becoming an integral part of every company's strategy for the next century."

"Professional services may not be the sexiest part of Internet deployment or investing, but in terms of investment opportunity, it's one of the best out there," Rimer said.

Rimer said most of these firms have shown tremendous growth. For instance, Scient, perhaps the most hyped darling of the group because of its all-star executive team that includes former IBM Consulting Group founder Robert Howe and Viant founder Eric Greenberg, has gone from zero revenue last year to more than $20 million in revenue this year. Scient's stock is trading at $68 a share today, up from an initial public offering price of $20. The San Francisco-based company, which has opened offices in Boston and Dallas since its IPO, expects to turn a profit by next March.

Christopher Lochhead, Scient's chief marketing officer, said the company is committed to building an organization for the long-haul.

"As far as we can tell, the market looks limited only by possibility," he said. "I have never experienced a market that's as frothy as this."

Ed Caso, analyst at First Union, said the services firms should easily increase revenues more than 50 percent over the next three years, with some growing 100 percent in the short-term. That compares to revenue growth at services giants such as EDS of about 8 percent for the quarter.

"I think we're only at the very base of a very sharp curve here," he said. "People have been talking about the Internet for awhile, but now we're actually starting to see rapid growth."

And along with that growth comes a lot of hype--mixed with a healthy dose of hubris from these high-flying firms, analysts say.

Credit Suisse First Boston, which helped take AppNet Systems and Viant public in June, sent shares in both companies rocketing last month after analyst Mark Wolfenberger urged investors to "back up the truck" and load up on the shares. While AppNet surged to 35 a share that day, it's now back down to 26. Viant is trading today at 48.5, down from a 52-week high of $56.75.

Proxicom, which went public in April and is now seeking a second round of funding, is trading at 51 a share today, up from 13 at the time of its IPO.

"The services market is splitting between the haves and the have nots," said Susan Scrupski-Miranda, head of IT Services Advisory. The jury is still out on whether the more established companies--such as EDS, CSC, and others--will be able to build their creative abilities to compete on the Net. "I don't believe they've done anywhere near the amount of work that companies like [Lante, iXL, Viant] have brought to the mix."