Five Net Names to Watch in '05

Big shops like Google may be hogging the spotlight, but smaller companies such as iSold It and Weblogs Inc. might be tomorrow's stars

By Scott Kessler

It has been almost five years since the dot-com bubble burst, and up until relatively recently, few entrants in the Internet segment have proven to be durable. Sure, interest rates have been at generational lows, but not surprisingly, capital has been hard to come by for companies in a sector that lost some 86% of its value (as measured by Internet Index) from Mar. 10, 2000, to Valentine's Day 2005. Wow. Didn't Internet stocks rally at some point?

These companies laid off hundreds of thousands of people. Nearly a thousand online outfits went out of business. Hundreds of billions of dollars were lost. Web developers went back to their old jobs. One-time online ad salespeople started selling other things. Former executives wrote books. The lifeblood of innovation -- people and capital -- turned away in pursuit of safer, long-term strategies. And consolidation thrived. The big got bigger (relatively speaking), and the small disappeared.

Now, that has all changed. It took the better part of five years, but people are again excited about Internet companies. Last year, Google (GOOG : S&P investment rank 4 STARS, buy; recent price: $195) completed one of the largest IPOs ever, and its shares still doubled in fewer than 50 trading days. Google's 2004 share appreciation was bested by two Chinese IPOs (51job and Shanda Interactive). There were 19 online-company IPOs last year, making the Internet the third-most active sector, according to Red Herring.


  Over the past 12 months, Internet venture-capital investments have been notable -- just look at eharmony, Fastclick,, and Webroot Software, which each raised $70 million or more. These were among the largest financings of any private companies over the last year.

Nonetheless, people seem to want to talk about only the industry's giants, such as eBay (EBAY ; 3 STARS, hold; $85), Google, and Yahoo (YHOO ; 4 STARS; $34). They're each worth between $40 billion and $60 billion.

However, given improving investor sentiment and resurgent industry innovation, I'm starting to think more about some emerging Net companies. Below are some brief comments on five private outfits to watch in 2005:

ChannelAdvisor provides technology and services that enable large companies, small businesses, and individuals to use online marketplaces to win customers and maximize inventory yield. Essentially, it strives to help make online sellers more effective and efficient. As companies contemplate their "eBay Strategies" and how to best use the Internet as a sales channel, those providing such services may find an opportunity, particularly with large enterprises.

iSold It is one of many eBay drop-off store concepts sprouting up around the country. People who don't want to spend the time or put in the effort selling items on eBay can bring them into an iSold It store. iSold It will set up auctions, interact with buyers, ship merchandise, and, if a sale is made, pay sellers (via check minus fees). With some 90% of eBay users never having sold a thing, I think a lot of aspiring sellers out there who may be in need of assistance. The drop-off store concept may have a bright future. Other participants in this segment include AuctionDrop, NuMarkets, QuikDrop, and Snappy Auctions.

Mozilla Foundation is the developer of one of the Internet's most popular software programs, the Firefox browser. Mozilla claims Firefox is faster, safer, and more efficient than competing products (including, of course, Microsoft's Internet Explorer). With 20 million users and material market-share gains, Firefox is garnering significant attention.

In January, 2005, its lead engineer and one of its Web developers were hired by Google. Both indicated they expect to continue to be very much involved with Mozilla, which describes itself as an open-source community of developers and testers. In February, 2005, Yahoo introduced a version of its toolbar for the Firefox browser.

SideStep is an Internet travel search company. SideStep is designed to enable users to concurrently search a variety of Web sites to find the best travel deals. Its searches include online travel agency and travel supplier (airline, hotel, and rental car) sites. With Internet users often going to several Web sites to find what they're looking for and compare prices, I think that so-called "meta-search" companies will become increasingly popular. Additional players in this segment include FareChase, Kayak Software, Mobissimo, and QIXO.

Weblogs Inc. is the purveyor of a network of more than 70 blogs, which it characterizes as the world's largest. The company is dedicated to creating trade blogs across industries in which user participation is an essential component of the resulting product. Weblogs Inc. network categories include Consumer, Technology, Wireless, Video Games, Media & Entertainment, Business, Life Sciences, Personal, and Events.

I believe blogs will grow increasingly prominent, because they offer interesting and unique content, are easy to search and organize, and have the potential to generate notable revenues and profits through the use of online advertising (primarily keyword search) and affiliate marketing. Gawker Media is another major network of blogs.

I wouldn't be surprised to see companies such as these make news on the financing front in 2005, by possibly raising private capital or taking steps toward an IPO. I believe some of the businesses highlighted above have bright futures. We'll see if investors (private and public) agree.

Note: Scott Kessler has no stock ownership or financial interest in any of the companies in his coverage area. All of the views expressed accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed. Price charts and required disclosures for all STARS-ranked companies can be found at

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2-STARS (Sell): Total return is expected to underperform the total return of the S&P 500 Index and share price is not anticipated to show a gain.

1-STARS (Strong Sell): Total return is expected to underperform the total return of the S&P 500 Index by a wide margin, with shares falling in price on an absolute basis.

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Analyst Kessler follows shares of Internet software and services companies for Standard & Poor's Equity Research Services

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