Will Google IPO bring back the bubble?

By Thomas Watterson

WASHINGTON - Some time in the next few months, Google, the Internet search company, is expected to "go public," or launch an initial public offering (IPO).

Depending on how Google's stock performs - and its effect on other Internet-related stocks - analysts say it may demonstrate whether the current rebound in high-tech stocks and technology mutual funds can be sustained, or whether this is another technology "bubble" like the one that burst so loudly in March 2000.

Right now, the rebound seems very real. Over the past year or so, prices of many Internet and other technology stocks have soared, more than doubling in some cases. These gains have meant big returns for technology funds, especially those that focus on the Internet. The WWW Internet Fund, for example, gained more than 41 percent in 2003, according to Morningstar Inc. And, after losing more than 79 and 54 percent in 2000 and 2001, respectively, the Jacobs Internet Fund advanced more than 100 percent last year.

But the gains were achieved because stocks in these funds rose from very depressed levels.

"A lot of companies were beaten down to a dollar or two dollars a share" after March 2000, says Richard Peterson, an analyst at Thomson Financial. "A couple years ago, Lucent was trading under $1 a share. Now, it's trading over $4 a share. Juniper Networks and others were trading at a fraction of their all-time highs. If you go from $200 a share down to $5, then go from $5 up to $10, that translates into a 100 percent gain."

So, while these stocks have made nice recoveries - albeit off low bases - investors are watching Google's stock offering closely. The Times (London) last month reported that the IPO would not happen this spring. But "nothing has changed" in the company's approach toward going public, says Google spokeswoman Cindy McCaffrey.

"Google's IPO will focus a lot of attention on the [Internet] again," says Marc Klee, portfolio manager of the John Hancock Technology Fund.

To the average investor, Mr. Klee notes, the best-known publicly traded Internet companies are Amazon.com, eBay, and Yahoo! But many other firms also benefit from the rapid growth of the Internet. For example, Klee points to service and communications companies such as Juniper Networks and Foundry Networks. After that come the equipment companies, including Cisco Systems and Nortel Networks. Finally, computer security companies such as Symantec Corp. and Network Associates benefit from the growing need for antivirus and antispam software.

The most important difference between all these firms and those that did not survive the bursting of the technology-stock bubble is that the survivors found ways to make money, experts point out. Amazon.com, for example, recently reported its first calendar year of profits for 2003. "You now have companies with a business model of generating revenues, offering services that have value, creating transactions, as opposed to just an informational site that is pretty to look at," says Lawrence York, president and chief investment officer of IPC Advisors, which manages the WWW Internet Fund in Lexington, Ky.

In addition to the hardware, software, and retail companies, some service firms have found ways to make money from the Internet. For example, "iVillage has become the leading player in providing information and resources to women. They sell ad space to attract women to the site," Mr. York says. "Then there's DoubleClick, a company that helps other companies place their ads on the Internet, much like an advertising agency, except that it's an online advertising agency."

The Internet has been "purged" of "most of the really excessive speculation," says Duane Roberts, portfolio manager at Dana Investment Advisors in Dallas. "The companies that are still out there, like eBay, Yahoo!, and Amazon, and the infrastructure companies and the networking companies for the most part have real businesses."

But with stocks of Internet and other technology companies rising so far so fast, some analysts are concerned that these companies' valuations (stock prices relative to their current or potential profits) are getting too high.

While prices of Internet stocks are "not as speculative or as ridiculous now as they were back in '98 or '99, there are certainly some valuations that are a bit stretched," Mr. Roberts says. He points to Amazon.com.

"I love their business," he says. "I'm a frequent customer of theirs. But if you look at their overall performance in relation to their stock price right now, you would need to continue to see a lot of excellent performance" to justify the price.

Even if the Google IPO does well and gives a boost to other Internet-related stocks, experts caution investors to view this sector as a long-term investment, and expect big swings in prices.

"We still aren't very far into the convergence of telephony, broadcast, and computing," says York at IPC Advisors. "So have a long-term horizon and understand that it's going to be volatile, because it's technology, and it's always changing."

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