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Aether Systems' Bold Moves Drawing Market Support

In early March, it was up an astounding 340 percent for the year, closing on March 9 at $315 per share.

Just five weeks later, those gains evaporated in a marketwide meltdown, as shares finished trading on April 17 at 71 1/4, slightly below the Dec. 31 closing price of 71 5/8.

But wireless information and transaction services provider Aether Systems has ridden a strong June rally to emerge as owner of the top-performing Internet stock of the year to date. Through Tuesday afternoon trading, shares of AETH were at 197 9/16, a YTD gain of 176 percent.

All this despite heavy losses ($33.3 million in Q1 alone) and a lofty valuation of 682x trailing 12 months' revenue of $11.36 million.

Given the more skeptical investment climate for Internet stocks in the past three months, this kind of market support for a low-revenue, money-losing, overvalued company is an anomaly. But the reasons for Aether's run-up earlier in the year and in recent weeks are fairly easy to understand.

First, the company is benefiting from the buzz around Internet-based wireless technology, which is shaping up as the Linux of 2000. Of course, after a torrid love affair in the second half of 1999, investors have virtually abandoned Linux stocks. I don't think we'll see the same kind of across-the-board flight from wireless stocks.

Second, Aether is being rewarded by investors for its aggressiveness. This is typical in early-stage markets; companies attract support from Wall Street for thinking big, even if it means heavy losses up front.

Just this year alone, Aether has:

Purchased LocusOne Communications, a maker of wireless supply chain fulfillment software, for $40 million;

Launched an electronic payments division for use with handheld devices;

Acquired Riverbed Technologies, a vendor of mobile computing software, for $800 million;

Invested $10 million for a 27.5 percent interest in Inciscent, a new company formed with Metrocall, PSINet and other investors. Inciscent plans to develop wireless e-mail, Internet access and other applications for the SOHO (small office/home office) market;

Purchased NetSearch LLC, which makes wireless systems for online merchants of products and services, for $25 million;

Acquired IFX Group, Europe's largest provider of mobile financial data, for $85 million;

Formed alliances with Reuters (to set up a new company to provide wireless data applications in Europe, focusing initially on financial markets); Nextel (to provide wireless 'Net and data software and services for the enterprise market); and messaging software and services provider Critical Path (to jointly develop and market messaging and collaboration products and services to businesses and consumers via wireless devices);

Launched a $15 million advertising campaign targeting prime time television and cable television.

To finance all this activity, Aether on March 22 raised $1.4 billion in a secondary offering of stock (at $205 per share) and convertible debt.

Company CEO and Chairman David Oros is a big believer in first-mover advantage, even as many in the industry are beginning to question that strategy. He recently told Upside magazine, "Everything is about a land grab."

The risk is that the notoriously slow-developing wireless market continues to lag behind expectations, leaving Aether and other wireless competitors waiting for buyers to catch up with them.

For now, though, it's clear that investors believe Aether's timing and ambition are on target.