FRAMINGHAM (04/10/2000) - The unprecedented volatility of high-tech stocks last week sent shivers through the investment community. But Wall Street watchers say companies involved in the Internet's infrastructure - network equipment vendors and service providers - are among the best-positioned to weather these market storms.
"No matter what applications or uses of the Internet are developed successfully, the underlying infrastructure will be in continued great demand," says Robert Abbe, a principal with Broadview Associates, a firm that brokers mergers between companies.
Less certain are the fates of Web services, e-retailing and business-to-business e-commerce companies, whose strategies for building revenue have not been proven. "The business models of the network infrastructure companies are well- understood . . . and they're likely to reach profitability in a nearer term," Abbe says.
The uncertainty comes after one of the most volatile weeks in stock market history. After a significant drop last Monday, the technology-heavy Nasdaq Composite Index went crazy on Tuesday, staging one of its biggest single-day declines and biggest single-day recoveries in only a few hours. The Nasdaq dragged the Dow Jones Industrial Average along for the ride.
By midweek, the markets had calmed, but the gyrations left the financial community wondering about the long-term prospects for venture capital investments, initial public offerings (IPO) and acquisitions of Internet ventures.
Some observers say the downturn in the market valuations of Internet firms is overdue. And many heralded last week's correction as the return to more traditional investing based on revenue and profits.
"The greatest successes that investors have had in the Internet space have been in network companies. That's why we've seen such an extreme rise in the valuations of companies such as Cisco Systems Inc., Ciena Corp., Juniper Networks and JDS Uniphase," says Cory Johnson, editor at large for TheStreet.com. "But these stocks have gotten almost too popular, and their valuations have become extreme . . . Everyone on Wall Street recognized that there had to be some belt tightening."
Nonetheless, Johnson says network firms are well-positioned for the long-term.
"Investors are coming back to companies such as Cisco, Nortel Networks and Tellabs," he says. "And venture capitalists are going to continue to invest in network companies because they are a much safer bet than" business-to-business or business-to-consumer Web sites, Johnson says.
Among venture capitalists, interest in broadband providers, optical equipment and component manufacturers remains strong.
"There are still lots of places to make investments in networking," says William Seifert, general partner of Prism Venture Partners. "Products that improve the raw speed, performance or reliability of networks are in demand. .
. . If the demand for the product is there, that will drive the entrepreneurs."
Seifert predicts the number of IPOs will decline as investors become more rigorous about testing out the business models of new ventures.
The question plaguing venture capitalists is whether the days of highflying, high-tech IPOs are over.
"A lot of the public offerings coming out recently have not performed," says Jack Biddle, principal of Novak Biddle Venture Partners. "If people stop buying IPOs, then venture returns will drop. If venture returns drop, then institutions will reduce their commitment to venture funds."
Biddle says many attendees at last week's Venture Capital Association annual meeting think the recent market madness is the beginning of a long-term slowdown. "The network space is one of the hot spaces," Biddle says. "It has nowhere to go but down."
The stock market volatility also may reduce the number of acquisitions, as it becomes more difficult for firms to use their stock to purchase others.
Abbe predicts network leaders such as Cisco, Nortel and Lucent will continue to acquire startups at an aggressive pace. But it may be harder for smaller, newly public companies to make acquisitions when their stock prices are fluctuating, he says.