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Everything In Between
It's important to remember that as long as the Internet is growing rapidly, there is an almost constant strain on the hardware, software, networking and telecommunications resources that make it work in the first place. Any and all technology developments that can enable what amounts to a faster Web are highly valued and have an instant, though volatile, demand. This demand allows companies to quickly deploy new products, repay R&D costs and achieve profitability.
Check just about anybody's IPO hall of fame and you'll find Internet infrastructure companies like Ciena (CIEN-NASDAQ), Foundry Networks (FDRY-NASDAQ), and Akamai Technologies (AKAM-NASDAQ). Both Ciena and Foundry Networks were in the black before going public, which helped immensely in differentiating the issues from the rest of the dot-com pack.
Ciena has been through a lot since its 1997 IPO. The company produces equipment that enables telecommunications service providers to multiply the bandwidth capacities of its fiber optic lines. After a very successful IPO and even more impressive aftermarket performance, Ciena struck a deal to merge with Tellabs, a manufacturer of complimentary telecomm equipment.
Literally days before the merger was to be approved by shareholders in August of 1998, Lucent announced it would not sign an equipment contract with Ciena. Lucent would have faced a significant competitive threat from the Ciena/Tellabs marriage. Investors panicked, Ciena's value plummetted and the merger was called off. During the past year, Ciena has steadily climbed from the low teens to more than $40 a share.
Foundry Networks makes high performance networking products, most notably high-speed Ethernet switches, for Internet service providers. After the summer slowdown in Internet stocks, it was Foundry Networks' IPO that sparked the comeback in high-flying Internet IPOs. The company is growing rapidly, even by Internet standards, with more than 60% quarter-to-quarter revenue growth and a more than 800% increase in annual revenues. Add to that the fact that the company is profitable and you have a no-brainer (which is why the stock is hovering at $180). At the same time, add this stock to your wait-and-see list. They could easily find themselves in a similar situation to Ciena and may very well be worth a second, less pricey, look during 2000.
Akamai Technologies works as a kind of global delivery service for Internet-based content. The company helps Web sites improve speed and reliability, while protecting against Web site crashes due to demand overloads. While not yet profitable, Akamai has done an impressive job of patching together a customer list that includes virtually every major Web destination. This nod of acceptance from the Web's ruling class, as well as CEO George Conrades' sterling reputation (formerly head of net legend BBN Planet) helped propel a skyrocket IPO in late 1999. Again, like Foundry Networks, Akamai's value is currently inflated by overenthusiastic hangers-on. But add this to the wait-and-see list for 2000; the rebound could be very interesting.
There will be more infrastructure companies teed up for 2000 IPOs. In the "can't miss" category is Corvis, led by Ciena founder Dave Huber. After two and a half years of R&D, Corvis offers a system that significantly lowers the cost of deploying and managing high-speed fiber-optic core networks. In addition, Corvis reduces the time it takes telecommunications companies to provision OC-48 and lower-speed interfaces to service provider customers from months to minutes. How do they do it? The company has developed a new generation of SONET (Synchronous Optical Network) rings by switching data optically instead of electronically.
This is heady stuff, and it would take a Ph.D. to really understand how it works.
I prefer to look at it this way. Huber demonstrated at Ciena that he knows how to hotwire fiber optic data transmissions. So far at Corvis, he's managed to get funding from both Cisco Systems (the name of the game in networking) and venture capital firm Kleiner Perkins Caulfield & Byers (one of the most sought-after VCs in the land). Can you say slam-dunk?
Hot spots
New technologies come and go. And with the nascent Internet, different business models have fallen in and out of fashion like Madonna personas. Following is a run-down of several hot spots that will come to the fore in 2000 and provide exciting investment opportunities.
In March 1999, I wrote about a company called USinternetworking (USIX-NASDAQ), the first of what are now called ASPs (application service providers). Much as Internet service providers lease Internet connectivity or Web site hosting services for a monthly fee over a contracted period of time, ASPs rent out business applications--such as e-commerce storefront, customer relationship management, and human resources management applications--for deployment over the Internet.
Since then, the sector has become red hot among technology investors. Joining USinternetworking with fall 1999 IPOs were Boston-based Breakaway Solutions (BWAY-NASDAQ) and NaviSite (NAVI-NASDAQ). Estimates vary widely on how quickly the ASP market will grow over the next few years.
Forrester Research says the space will grow from US$150 million in 1999 to US$6 billion by 2001. IDC projects a more modest US$2 billion market by 2003. Either way, these companies are finding a solid market for their model among middle-market businesses, and with the improving price and performance of available bandwidth, their growth should accelerate.
The stock prices for all three companies are currently hovering in the upper US$40s and low US$50s. As the ASP mantra spreads throughout the industry, all three of these stocks will rise to the US$100 level. On the IPO front, keep a watch out for Corio. Based in Redwood City, California, Corio brings perhaps the best backing and track record yet as a pure ASP. With investors including Kleiner Perkins Caufield & Byers and Lehman Brothers, a 2000 IPO looks like a good bet.
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