It's not just Google. Plenty of prospective Internet IPOs are packing profits -- and there's lots more where they came from

Four years ago, Internet initial public offerings seemed too easy. Then, they seemed impossible: Just 14 Net companies went public from 2001 to 2003. Now, has the Web found a Goldilocks IPO market: Not too hot or too cold?

It looks that way. After three frosty years, the Web IPO market seems close to just right. So far this year, five Net companies have gone public, and 23 have filed paperwork with federal regulators. Here's the striking thing: Of those 28 companies, 20, or 71%, are profitable. Compare that with 1998 to 2000, when just 4% of Net IPO companies were in the black, says Thomson Financial (TOC ).

Today's profits are only the beginning of the story. The best of the up-and-comers look the way Net companies are supposed to look, with fast growth and business models that should turn small revenue gains into larger spikes in profits. In 2003, the 28 companies showed an aggregate 56% jump in revenue and a 490% jump in net income under traditional accounting rules. The numbers aren't just due to Google's explosive growth. Take out the search-engine phenom and the Class of '04's sales rose 35% -- while a $14 million loss turned into a $400 profit. "We're seeing a next generation of companies that have taken the time to build solid [business] models," says Chip Morris, a money manager at Integrated Capital Partners in Baltimore.

These companies illustrate some of the most important shifts the Web is bringing to business. First, online advertising is not only booming -- it's also evolving well beyond banner ads, as current ipo candidates Google, Advertising.com, and Shopping.com help make the Net more sophisticated in matching advertisers to audiences than ever. The result? Net advertising is on pace to soar 30% or more this year, to nearly $10 billion, closing in on the $12 billion spent on magazine advertising. Another business on the rise is software as a service. Instead of charging hundreds of thousands of dollars for shrink-wrapped CDs, Salesforce.com, Taleo, and RightNow Technologies are delivering software to corporations over the Net for as little as $65 per user per month. Finally, look to China. Soon-to-be-public Mtone Wireless Corp. and other Chinese Net companies are helping open a Web market that promises to become the largest in the world, perhaps as early as next year. Mtone is developing games and other content for mobile phones that could help make phones in China what PCs are to the West.

Still, investors remain picky. Companies that are too small or lose money have gotten cool receptions. Unprofitable used-book exchange Alibris Inc. pulled its planned IPO in May, saying it had gotten too few bids for a planned auction. "The small ones are always iffy," says Linda Killian, co-manager of the IPO Plus Aftermarket Fund (IPOSX ). That could spell trouble for companies like gay-focused portal PlanetOut Inc., which lost $752,000 last year on $19 million in sales.

While Google gets all the glory, a more promising investment in online marketing may be Advertising.com. It certainly won't have anything like the search giant's nosebleed market cap. Plus, it expands on the most significant innovation in Web advertising: shifting the risk of an ad not working from advertisers to media companies. Advertising.com buys cheap ad space on Web sites, uses proprietary technology to match ads with Web surfers, then resells the ads to clients like cable channel HBO (TWX ) and continuing-education provider Apollo Group (APOL ).

While Google and other search engines get paid when consumers click on sponsored links next to search results, Advertising.com only gets paid if surfers register at an advertiser's site, buy something, or request more information. Advertisers will pay up for such tangible results. South Carolina's Parks, Recreation, & Tourism Dept. paid Advertising.com up to $2 for each surfer who asked for a vacation guide, compared with the 12 cents it could have spent for a search-engine click. "You get someone who orders the product, compared to someone who's just looking," says Catherine D'Azevedo, media director at the Leslie Agency, a Greenville (S.C.) ad firm that ran the state's campaign. Advertising.com's sales surged 79% last year, to $132 million, and its net income hit $12.6 million, before a $6.1 million tax benefit.

Another upstart in online advertising that's shaping up as a hot IPO is Shopping.com. The price-comparison site, whose chief operating officer is former Yahoo! (YHOO ) exec Nirav Tolia, lets people compare prices online for everything from DVD players to pruning shears. What's innovative is that Shopping.com taps two ad streams at once. It charges advertisers who put their ads alongside search results, and it collects referral fees for consumers who click from within the site's price listings to a merchant's store. Shopping.com doubled sales, to $67 million, last year, and earned $6.9 million.

Underhyped gems are not as easy to find in the software-as-a-service business. That's why attention has focused so keenly on Salesforce.com. It has the strongest brand, it's growing fast, and it's attacking the huge $7 billion market for customer-relationship-management software. Last year, revenues soared 88%, to $96 million, while the company broke into the black with profits of $3.5 million. Despite its scrape with regulators over pre-IPO publicity that has delayed the deal, Munder Net/Net Fund portfolio manager Paul T. Cook says Salesforce may be the strongest IPO after Google. He expects Salesforce to triple in size over the next four years, to nearly $300 million in sales, while profits should hit $36 million.

Don't ignore the other side of the world, though. Three Chinese Net companies have gone public so far this year and Mtone Wireless is preparing to sell stock to the public. All four are profitable, their stocks are cheap by American standards, and they're sitting on a huge market.

The risks involved with these companies have kept their stocks inexpensive. Investors' big fear is that the Chinese government may decide to restrict Net services in some way. The result is that these Net stocks trade at 17 to 33 times earnings, compared with 50 to 80 earnings for U.S. dot-com leaders. "These companies are much more profitable and growing much faster and should get a premium to U.S. companies, but that has been offset by the [political] risk," says analyst Safa Rashtchy of Piper Jaffray Cos. (PJC ).

The key to making money is spotting less-than-obvious stars. Since 1980, two tech IPOs a year have risen tenfold over time, producing nearly all long-term profits, as small gains and losses cancel one another out, says Morgan Stanley (MWD ) analyst Mary Meeker. With an initial market value that's expected to be around $28 billion, Google is probably too big for the role: It would have to reach Microsoft Corp.'s (MSFT ) market value now to be a 10-bagger. That's why the best bets may be companies such as Advertising.com, Shopping.com, Salesforce.com, or Mtone Wireless. After the irrationality of both boom and bust, Web companies are getting a cordial but sober hearing on Wall Street. That's reason to feel exuberant.

By Timothy J. Mullaney in New York

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