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Friday, October 9, 1998 Published at 17:14 GMT 18:14 UK

Business: The Company File

Rise and fall of Internet stocks

A few internet companies have become dominant

Internet stocks have become one of the hottest performers on the US stock market this year.

One leading index of Internet stocks puts them up 33% for the year - while other major stock market indices have shown losses.

And individual companies have done even better.

Market leaders Yahoo, the leading search engine, and, the Internet bookseller, have seen their value soar this year., which has never made a profit, is worth $4.2bn. At the beginning of the year, its stock was worth $29 a share. By July it had risen to $139 a share - a 450% increase.

Yahoo is even larger, now worth $9.8bn. Its stock rose this year from $33 a share to $131 by the end of September.

The biggest Internet company - America Online, the Internet service provider - has seen its value increase to $18.5bn.

And Inktomi, which designs infrastructure software for Internet companies, is worth $1.2bn just four months after coming to the stock market.

Falling shares

But in the last few weeks the boom in Internet stocks has finally begun to flag.

So far this month, Yahoo shares have fallen more than $20 a share to $104, while shares are down more than $50 a share to $85.

Smaller Internet companies have fallen even further. Shares in another search engine, Lycos, are down by half since their high of $53 a share in July. Netscape is down by two-thirds.

The declines follows a drop in the whole high-technology sector. The Nasdaq index, which lists companies like Microsoft, Intel, and Dell Computers, has dropped by 20% in the last two weeks.

Analysts believe that the need for cash by many private investors has led to the sell-off. However, many of those selling their Internet stocks have made a tidy profit, despite tumbling prices.

Where are the profits?

But there is a bigger question mark hanging over the future of the Internet companies

Many of the leading Internet companies have yet to make a profit, and even if they do, it is tiny compared to their stock market value.

Yahoo, for example, reported increased profits - of only $16.7m for the quarter, compared to $680,000 for the same period last year.

Lycos and Netscape are just moving into a small profit this year.

And is still losing money, despite being worth more than rival Barnes & Noble.

But these small companies are growing fast.

Lycos expects to double sales from $56m to $115m next year.

Yahoo has tripled sales in the last year to $53m last quarter. has a customer base of 3.1 million, and its sales are now running at an annual rate of $500m.

And investors seem to be betting that the growth of electronic commerce will continue to grow exponentially, making these companies a one-way bet in an uncertain world.

"The digital economy will be a huge trend in the next five years," argues Steve Appledon of NetNet Fund, which invests in Internet companies.

Brand recognition

The bigger Internet companies have quickly established themselves in the eyes of the US public, gaining brand recognition much faster than established companies like Coca-Cola and McDonalds.

According to a recent study by Opinion Research Corporation, seven Internet companies are recognised by at least one in four Americans.

The most well-known, America Online, is recognised by 79% - including many who never have used the Internet, and has 13 million subscribers.

Web portals Yahoo, Infoseek, and Excite, bookseller, and Netscape, who developed the most popular browser, are also on the list.

The popularity of these sites means that there is tremendous potential for advertising.

Yahoo, for example, has 144 million page views a day, and nearly 2,000 advertisers.

And with the number of people using the Internet expected to double in the next few years, they believe that advertising spending is bound to increase.

Consolidation inevitable

But with the struggle for brand recognition on the ever expanding web, it is the strongest and most well known brands that are set to expand.

They need to acquire other services in order to stay competitive in the face of rivalry from larger companies.

Search engine Lycos, for example, has acquired rival HotBot and virtual community Tripod.

AOL has teamed up with Sportsline, part of the CBS network, to enhance its sports coverage.

Infoseek, on the other hand, has been partially taken over by Disney Corporation, which also owns rival ABC television and will launch a new content-rich site, which will be known as Go.

Meanwhile GE, which owns NBC television, has bought another search engine - Snap! - a unit of technology news publisher C-Net.

Microsoft is seeking to join the game, redesigning its Internet service MSN as a portal.

And Netscape, inventor of the web browser, is trying to turn its home page into a "self-service" portal site.

Earlier this year, the biggest US telephone company, AT&T, reportedly tried to buy America Online, and has now formed an alliance with Yahoo.

This week, bookseller Barnes and Noble joined forces with giant German publisher Bertelsmann to challenge's dominance on the net.

The price of entry may be getting higher - but if the growth in the size of the Internet continues, the winners are likely to find the potential for profit growth is just as high - and today's high share prices realistic evaluations of future earnings.

However, investors should take note of the many Internet start-ups making a splashy entry on the stock markets, only to disappear a short while later.

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