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Taking stock of Internet stocks

In light of the recent strong appreciation of public and private Internet companies, how does an investor evaluate their performances?

Going forward into 1998, some specific areas of growth for Internet stocks have emerged--from electronic software distribution to Web-based areas of automation.

Those are just a few of the perspectives my colleagues Genni Combes, Paul Noglows, and I came up with following Hambrecht & Quist's recent Internet Conference, plaNET.wall.street, held in Snowbird, Utah.

Other areas that show great growth potential include service-bureau related business models, such as VeriSign (VRSN), LinkExchange, and GeoCities; electronic software distribution and Internet-centric value-added resellers, like Intraware; Web-based areas of automation, such as Ariba Technologies, CommerceOne, Smart Technologies, Vignette Corporation, and Calico Technologies; and business-to-business companies as well as business-to-consumer services companies.

What makes these companies stand out?

Given the recent strong appreciation of public and private Internet companies, the Hambrecht & Quist Internet Research Group has come up with universal metrics to evaluate their performances.

First among the criteria: Alliances and acquisitions will remain a key measure for evaluating Internet stocks.

While press releases trumpeting new partnerships will continue to flood the market, it is important to take a hard look at the "meat" behind the alliances being signed.

Companies are throwing around significant sums of money trying to gain distribution. One example that comes to mind is Cybermeals, which has signed a flurry of high-priced deals with a range of partners, including America Online ($20 million), Lycos ($16 million), and Excite ($15.5 million). It is important, however, to differentiate between these deals and other partnerships that potentially have true impact on the long-term strategic positioning of the companies involved.

Regarding the latter, we would include SportsLine USA?s partnership with CBS, whereby the network broadcaster took a 12 percent ownership stake in the online sports news service in exchange for more than $62 million worth of promotion and content.

Audience is another key metric for gauging Internet stocks and a company?s ability to effectively increase audience for its services, in terms of both frequency and reach.

When examining the specific growth rate of a particular service, it is important to always keep in mind what that service already has built. AOL continues to add members at a healthy rate of about 300,000 users per month, but it is significant to note that it is already building from a huge installed base of more than 11 million members worldwide.

As services such as AOL and Yahoo attain critical mass in terms of users, the advertising and electronic commerce opportunities afforded them are greater than those players who are still in the early stages of building their audience bases--albeit sometimes at higher rates of growth.

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