They Might Be Giants

On Monday I wrote about the largest Internet companies in terms of market
capitalization, and how this group has evolved over the past year.

The current crop of largest ‘Net players is dominated by infrastructure, B2B
e-commerce and Web services providers, a marked change from a year ago, when
consumer-oriented companies such as Amazon.com , eBay
and priceline.com cracked the top 10.

One reader asked me to dust off my crystal ball and predict what next year’s
list of 10 largest ‘Net companies will look like. Since I expect the
infrastructure and e-commerce sectors to remain investor favorites, most of
the incumbents will remain. But not all.

Three companies in particular are prime candidates to fall off the list next
year. The first is America Online , and not because I expect
it to falter. Following its expected merger with Time Warner, the company
will be a true digital entertainment giant.

What it may not be, however, is an Internet company, since Time Warner will
be supplying most of the revenue. Objectively, that makes the new entity an
old-media firm with a major Web presence.

Procurement software vendor Ariba may not be on the top
10 list next year because it’s overpriced and not likely to grow into its
$37.5 billion market cap any time soon. Ariba, now ranked No. 6 among all
‘Net companies, is valued at 232x trailing 12 months’ revenue of $161.4
million. The company also is losing money, but beat expectations last
quarter and seems headed in the right direction.

Web host and services provider Exodus Communications ($24.7 billion) already has slipped to No. 11 behind wireless
device manufacturer Palm ($26.6 billion). Like Ariba,
Exodus is losing money, although, at 50x TTM revenue of $483.2 million, it
is a much better value than ARBA.

Now let’s look at some up-and-comers that could join the list of top
Internet giants:

The dominant player in the wireless device market, Palm has $1.06 billion in
sales in the past four quarters and is profitable. It is now valued at 26.5x
TTM revenue and should continue to be the primary hardware beneficiary of
the wireless explosion. PALM is a candidate to surpass all companies but
Cisco Systems .

Check Point Software Technologies , now ranked No. 12
with a market cap of $22.3 billion, is the leader among network firewall
vendors, with a market share of about 52%. For the past four quarters, the
company has increased revenue, gross margin, net profit and earnings per
share. Not exactly a bargain at 76x TTM revenues, but CHKP continues to do
everything right.

Currently ranked No. 16 with a market cap of $13.0 billion, caching server
and search engine software vendor Inktomi is a good bet
to leapfrog over several other companies, including Amazon.com and eBay.
INKT is the leader in the search engine and caching software markets, and is
well-positioned to dominate those markets in the wireless sector. Like Check
Point, Inktomi is valued at 76x TTM revenues (of $171.1 million). I’ve long
said, and still believe, that Inktomi will grow into its valuation.

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