From Net nerds to kings of the Nasdaq

SO IT is fashionable these days to buy Internet stocks. You know this because they keep rising at rates that beggar belief. Witness the recent gravity-defying ascent of the technology-laden Nasdaq index in New York, only interrupted yesterday by a bout of profit taking.

It is also fashionable to warn that the Internet is a bubble ready to burst and that wise investors will keep their distance. But is that right? Are we in a midst of a revolution so important that most of us just have trouble grasping it?

"The Internet," Fortune magazine says, "is the foundation of the new industrial order". This smacks of hyperbole, but there are investors out there who believe it. What they see is a crossing of a great divide, where the Internet is no longer the domain of the digerati, but is suddenly becoming mainstream. The Internet, in other words, has transcended being a toy for nerds and become the high street of the new millennium.

Never mind, then, that some companies leading the Nasdaq charge have yet to make one cent of profit, such as Amazon.com, the red-hot online book and CD retailer. If consumers are about to plunge en masse into the digital universe, the potential for profits down the road is almost unimaginable. With stakes so high, battle has been engaged between the players who want to harness that traffic and control it.

You do not have to search far to see the signs of this explosion. According to International Data Corp, a computer research group, the number of people using the World Wide Web in the US alone is set to soar by 28 per cent this year alone to 147 million.

People log on for many reasons. There are chat rooms to visit, information pages giving the latest weather and travel reports, and lonely hearts forums. Most dazzling, however, is the rush to the Web to shop: 16 per cent of US car buyers now go online to check and compare bargains. True, many still go to a showroom to make their final purchase, but for how much longer?

The surge in online retailing was never more vividly demonstrated than during this last Christmas gift-buying season. Consider the story of Ebay, an online auction house, which listed as a public company last September. Ebay is only one of a myriad newly-listed Internet companies to have seen its value climb to the stratosphere very quickly. In four months its shares have soared 1,519 per cent. At that rate, the company promises to deliver a 1 million per cent annual return on investment.

It is a tale that is even more extraordinary when you consider how it started. Ebay founder Pierre Omidyar, 31, had the idea of offering auctions in the Internet after searching for a way to help his girlfriend expand her collection of Pez dispensers - those cute toys that spit out oblong sweeties. Omidyar's salary last year was a modest $67,446, but the company gave him stock worth - wait for it - $4bn. The market value of Ebay is now six times that of its non-virtual auction house great-uncle, Sotheby's.

Such value comparisons offer another illustration of the fabulousness - or the insanity - of the investor rush to these companies. Amazon.com gained no fewer than 1 million new customers in the run-up to Christmas. If it operated in bricks-and-mortar shops it would have had to have shelves extending 101 miles to accommodate the books and CDs sold at Christmas. Its market capitalisation now stands at $29bn, compared with $16.5bn for Sears, the department store that has been in the retail business for more than a century.

Or how about Yahoo!, the Internet directory company that went public in April 1996? Since then its shares have risen 95-fold to give the company a market value of $40.9bn, larger even than such blue-chip monoliths as Boeing and Xerox. It was expectations of better-than-expected earnings due out from Yahoo! after the close of markets last night that drove the Nasdaq to its seventh consecutive record high on Monday, although the index fell back sharply yesterday amidst profit taking. On Monday Yahoo! shares rose $70 1/8 to $414 1/2.

Yahoo! is one of four Internet stocks gaining special investor attention because of their status as so-called Internet portals. If controlling traffic in cyberspace is the main prize, then it is the portals that have a head start. Like its three main competitors - Lycos, Excite and Infoseek - Yahoo! offers consumers a single web page from which they can begin their Internet journeys. They offer direct, one-click, access to the most travelled areas of the Net, such as news, personal finance, sports, travel, entertainment, recreation, romance chat rooms and so forth.

Whoever attracts the largest numbers of users to their portal page stands one day to rule the Internet. So far Yahoo! is winning the race. Showing that it well understands this, Disney yesterday launched a portal of its own. Called GO Network, it is a joint venture with Infoseek, which is 43 per cent Disney-owned.

As the primacy of the portals in cyberspace becomes more obvious so, in turn, does their attractiveness to advertisers - and their potential for making profits. With 70 million people hitting Yahoo! every month, no wonder advertisers are beginning to pay attention. According to Jupiter Communications, another Web research group, advertising on the Internet is set to rise from a fairly modest $940m in the US in 1997 to $8bn by 2002.

Those pouring money into Yahoo! and other darling stocks of the Internet are all looking for the new Microsoft. Those holding back are wondering how long these outlandish valuations can last. Who knows?

There is one other factor in favour of the bubble growing before it bursts. There are simply not enough Internet stocks out there. Paul Cook, manager in New York of the Munder Net Fund, says: "There are too many people who want to own these stocks and not enough to go around. The opportunity is open-ended".