The stock market is smiling, once again, on Internet IPOs.
Friday's stunning debut of DoubleClick, the New York company that sells online advertising services, saw the stock open at US$29 (up $12 from the $17 IPO price), top $31, and close at $26.
Music retailer CDnow joined the Nasdaq listings on Tuesday at $16 and jumped to $22 by the end of its first day of trading. And late last month, Verisign's freshly issued shares enjoyed a surge of 82 percent from their target price on the day the provider of digital certificates started trading.
What's behind the string of raucous coming-out parties?
It's tough to discount the buoyant state of the markets themselves, with the Dow Jones Industrial Average scoring a series of record closes and the Nasdaq flirting with all-time highs.
"A lot of the success of these IPOs is tied to the exuberance of the market," said Geoff Yang, a general partner at Institutional Venture Partners, a venture capital firm that provided seed financing to search engine Excite before it went public. "VeriSign and DoubleClick are concept deals, and the only time you can really get concept deals done is when the market is hot and people are looking for new stories. We're talking about companies with limited revenues and no earnings. You can't do these deals in a down market."
Others say that the Internet-oriented IPOs of 1998 are simply satisfying pent-up demand.
"There haven't been that many investment opportunities for pure Internet plays lately," said Steve Jurvetson of the venture capital firm Draper Fisher Jurvetson. "We see opportunities left and right to invest in great private companies, but in public markets, the choices haven't been as varied."
While CDnow belongs to a sector - Internet retailing - that already includes a few public companies like Amazon.com and N2K, the parent of Music Boulevard, Jurvetson said that VeriSign and DoubleClick are "new kinds of investment opportunities for the public market. Until recently, you couldn't buy into ad networks or digital certificates."
Greg Vogel, an analyst at NationsBanc Montgomery Securities, said that the new wave of successful Net IPOs isn't evidence of "a renewed love affair with Internet companies." Rather, the three companies that have gone public are "leaders in their individual markets," according to Vogel, whose employer was one of the underwriters for CDnow's offering.
"They're quality companies that are offering real solutions, and they have a significant potential for rapid revenue growth," Vogel said. "That's why they're doing successful IPOs."
The new issues are also benefiting from the track record established by the companies that went public in 1995, 1996, and 1997.
"Internet stocks aren't so new anymore," said Steve Tuen, an analyst at IPO Value Monitor, a daily report for professional investment managers. "People know more about how to value these companies, and we've seen some of them enjoy really spectacular growth, like Amazon.com"
Indeed, Yang said that the first generation of Internet companies were pressed to go public too early, leading to a period of dashed expectations and few remarkable performances.
"In 1996, a combination of a hot public market and companies like Yahoo and Excite needing capital to grow forced them to go public after only a year or 18 months in business," said Yang. "They had no revenue and no earnings. Throughout most of 1997, there were no fundamentals that made you believe the stocks would go anywhere, and thus, no new IPOs. "But by the end of last year, the companies began posting real revenue growth, and you started to see some momentum," Yang said. "In 1998, receptivity to IPOs is up again because the original class of public companies are really showing that there is a revenue model, that this is a legitimate medium."
Vogel at NationsBanc Montgomery said he believes that investors are getting savvier about Internet stocks, too.
"Back around the time of the Netscape IPO, lots of people said, `Anything that's Internet, I'm gonna buy,'" he said. "That's stopped, and now people have a better feel for companies that have real business models."
But Dale Wettlaufer, a writer and analyst at the Motley Fool investment site, isn't so sure that investors have gone completely rational.
"Some people still look at the market as a way to get a rush, and feel they have to be in on every IPO, or else they might miss the next Netscape," Wettlaufer said. "I personally like to buy profitable companies. You don't have to go into a stock on the first day - you can wait five or 10 years to buy and still get a tidy return. In five or 10 years, if Amazon.com is successful, I think I'll still have a chance to pick it up and get a 20 percent return."
What's Wettlaufer's investment strategy for the present, since he's opted to stay away from the Internet IPOs? He bought stock in the San Francisco investment bank Hambrecht & Quist, which underwrites many Internet IPOs, including VeriSign's.
"I bought it last spring at $16, and now it's almost at $30," Wettlaufer boasted. "They're a great investment bank, and rather than me trying to track down a bunch of good IPOs, I let them take care of that. And they produce a wonderful return."
