Personal Finance: Internet Investor: Hi-tech stocks cannot net such large gains for much

Few analysts would disagree that what has been happening on Wall Street over the course of the past few months is a classic stock market bubble. The only argument is over how loudly it will pop when the Federal Reserve, the central bank, does eventually put up US interest rates. However, there is an interesting side show to the main market action, which is taking place in the hi-techs as they are known.

Specifically, the action is in Internet stocks rather than general software or hardware, where both the respective industry leaders, Microsoft and Intel, are slugging it out with various state and Federal authorities over alleged monopolistic behaviour.

Very little money is actually being made out of the Internet. In fact, only five out of the top 25 most valuable internet companies are actually profit-making. However, that embarrassing little fact has not stopped the shares of the leading internet companies from soaring.

America OnLine (AOL), which also owns CompuServe, has 12 million paying members and has seen its market capitalisation peak at more than a billion dollars for every million members. Yahoo!, Excite, Lycos and Infoseek are the four most popular US-based internet "search engines". These companies, whose free services allow us as individual surfers to search for what we want on the net, have seen their combined market capitalisation rise almost to equal that of AOL.

Even a service which is little more than a sophisticated notice board recently changed hands for $33m (pounds 20m). Silicon Investor calls itself the "controversial home of individual investors". These individuals the US website describes as sophisticated people who invest their own money for themselves.

The site claims to have many US technology company directors among its 100,000 members who swap investment tips and research, posting their messages on the site after paying a $125 life membership fee.

You also get search tools, which allow you to view all the messages which pertain to stocks in which you may be interested.

Activity has not been consigned to the other side of the Atlantic. ScottishPower's Scottish Telecom subsidiary paid pounds 66m in cash for Demon Internet, which works out roughly to pounds 370 per subscriber. Founded in June 1992, Demon Internet was the pioneer of low-cost, flat-rate Internet connectivity in the UK for both business and home users. It is the largest dial-up Internet service provider in the UK, with over 70 per cent of this market. Mind you, there is more to this acquisition for Scottish Telecom than internet market share. It will also boost its annual turnover by around pounds 20m as Demon Internet's telephone bill switches to it and away from BT.

Will the Internet stocks' bubble burst? Yes, of course it will. Bubbles always burst, slowly deflating, maybe, or explosively decompressing perhaps. There will be a shakeout in the sector. It has happened before. Just ask anybody who bought Netscape shares at their peak before Microsoft turned its attention to the world wide web. However, what does makes these stocks different to the rest of the market is their age.

The internet is not a mature business. And, yes, you can read that statement in more ways than one. The prices of internet stocks are being driven by forecasts of massive increases in advertising spending on the web by businesses attempting to reach consumers who will themselves, within a few short years, be spending even larger sums of money buying through websites.

Imagine at the turn of the last century somebody had offered you a glimpse of how important the car was going to be in the 20th century and then offered you the chance to invest in automobile stocks. Mind you, with my luck I would probably have gone for the company making square wheels (to stop the car rolling back down hill). The trick with investing in Internet stocks for the 21 century is to make sure that we avoid the "square wheel".

Silicon Investor: www.techstocks.com