Web Stocks The New Rules

Kiplinger's Personal Finance Magazine, April, 2000 by Steven T. Goldberg

Broadband bets

THE FUTURE OF the Internet is clear: It's broadband. Broadband means a much faster Internet with high-quality audio and video. The race to build that new Internet is under way. "Optical fiber is one way of accomplishing it," says Drew Cupps, manager of Strong Enterprise fund. "Other ways are through microwaves, satellites, cable-TV connections, or over the old copper wires on our telephones."

Whoever the eventual winners are, Broadcom will likely sell them the chips. Broadcom (BRCM, Nasdaq, $170) has developed semiconductors for expanding bandwidth through cable, satellites and copper wiring. "This is really tomorrow's Intel," says Amerindo Technology's Vilar.

Broadcom is expected to earn 71 cents per share this year, meaning it trades at a stunning 193 times earnings. But sales rose 149% last year. "We expect Broadcom to dominate its targeted markets, benefiting from the booming demand in broadband access," says Salomon Smith Barney analyst Clark Westmont.

Com21 (CMTO, Nasdaq, $33) sells modems for cable-TV lines. Analysts expect Com21 to lose 48 cents per share this calendar year but turn a profit next year. While the stock has back-and-filled the past 12 months, sales are growing rapidly. It trades at nine times the past 12 months' sales.

Artisan's Ziegler says cable companies have made modems a priority. "We think cable modems are going to get rolled out very quickly." Moreover, Com21's stock is much cheaper than that of its main competitor.

As its name suggests, Copper Mountain Networks provides fast Internet links through copper phone wires via digital subscriber line (DSL) equipment. Copper Mountain (CMTN, Nasdaq, $71) has roughly 40% of this rapidly expanding market, according to Robertson Stephens analyst Paul Johnson. Analysts expect the company to earn 55 cents per share this year, meaning the stock is selling at 129 times earnings. Analysts also predict 40% annual earnings growth over the next five years.

Diqital Microwave (DMIC, Nasdaq, $38) sells microwave radio equipment that transmits voice and data. While most sales are to cellular-phone companies, Internet sales are mushrooming. "Somebody has to provide the plumbing for the Internet, and that's what these guys are doing," says Ferris, Baker Watts analyst Matthew Robison. "They are growing like crazy."

Strong Enterprise's Cupps says Digital offers a good option for high-speed Internet connections. "You put a radio on the roof of a building and shoot the data through the air." Analysts expect the company to earn 41 cents per share this calendar year, meaning the stock sells at 93 times earnings.

Web service stocks

WEB-SITE service companies are like service stations along the Internet highway. As traffic and volume increase, these firms should see rising revenues.

Exodus (EXDS, Nasdaq, $115), for instance, already operates 19 data centers like the one in Sterling, Va., and it plans to open 15 more this year. Donaldson, Lufkin & Jenrette analyst Harry Blount calls Exodus a "category killer" and predicts that sales will increase more than 50% annually over the next four years. Analysts expect the firm to lose 83 cents a share this year.