Investors' task: discerning the future of technology

CAMBRIDGE, MASS. — CAMBRIDGE, Mass. -- Trying to comprehend the technological changes under way in communications is difficult enough.

Trying to figure out how to make money from them is absolutely exasperating.


Traditional television, telephone and computer relationships are being shuffled, rearranged and combined to form the new order.

"All of our labels of the past, such as broadcast or telephone, will be too confusing in the future," said Reed Hundt, chairman of the Federal Communications Commission. "What we're talking about now is simply product and distribution."


At a recent Nieman Foundation conference at Harvard University to discuss the on-line era, battle lines were drawn among the several hundred participants. Traditional purveyors of information and upstart technological services eyed and discussed each other's strengths, speculating on how they could compete, coexist or join forces.

"Cyberspace represents a confrontation of gorilla vs. guerrilla," said Nancy Hicks Maynard, who heads the media consulting firm Maynard Partners Inc. of Oakland, Calif. "The gorillas are the big companies with financial resources and the guerrillas the more nimble niche players."

This revolution is spawning volatile investments. Just look at popular on-line services and the Internet, which links as many as 46,000 computer networks serving perhaps 20 million users.

There aren't many pure stock plays yet in the global computer web, and prices are propelled by hype and dreams. There are hopes of emulating the early days of computers and semiconductors when initial investors were outrageously rewarded.

The strategy is to grab a stock as it ascends, fully prepared to exit on any signal that the run-up may end. No one can be sure how long it will be before a nose-dive, so the investor must monitor closely.

America Online Inc., which has split its stock twice in the past year and seen its stock price triple, is the most successful commercial on-line service offering news, games, chat boards and limited Internet connections to 2.3 million customers. Wall Street generally likes it despite its breathtaking valuation.

"America Online is a core holding in the on-line and Internet services industry, and we see the Internet market growing from $850 million to $4.5 billion in the next three years," said Michael Parekh, analyst with Goldman Sachs. "While the Internet is open and hundreds of firms can participate, firms that are the first movers have an advantage in market share and gaining customers."

America Online's direct competitors CompuServe (a division of H&R; Block that one day could conceivably be spun off) and Prodigy (owned by IBM and Sears, Roebuck) seem to be slipping on a relative basis, according to Keith Benjamin, analyst with Robertson Stephens & Co. "After a few quarters of 200-percent growth, this stock selling at over 50 times projected earnings looks reasonably priced," said Mr. Benjamin, noting America Online's subscriber growth.


But lately there's been corporate insider selling.

"As more companies put up web sites and Internet content gets richer and richer, the value America Online had initially is eroded," warned Harvey Poppel, managing director with Broadview Associates. "Profit margins that many analysts anticipated are subject to substantial risk."

Even more risky Internet stocks for the aggressive are:

* Netcom On-Line Communications Services Inc., providing full Internet connections to 115,000 customers. Its stock price, which more than doubled after it went public late last year, has since settled back a bit. It plans another public offering.

* Performance Systems International, with full Internet links to 3,900 business accounts and 20,000 individual computer users, which went public the beginning of May.

"They're intriguing and have potential, but these two are very, very, very, very expensive stocks" as gauged by earnings, observed Nick Moore, analyst with Franklin Funds. "Their valuations are scary."


* UUNet Technologies Inc., providing Internet access options, applications and business consulting, filed for an upcoming initial public offering. It will be primary Internet dial-up link for Microsoft's planned on-line service.

Less risky are equipment makers. Mr. Moore likes Cisco Systems, dominant in routers, which direct information throughout a network, and Sun Microsystems, which manufactures servers that store and deliver information used on the network.