Although Web hosting companies are not usually profitable, they have become a hot commodity on the market for initial public offerings (IPO) because of their perceived high growth potential.
According to Michele Pelino, senior analyst of the Yankee Group’s Internet Market Strategy Group, the Web hosting market will grow to $14.4 billion by 2002 from $4.4 billion in 1999, although it "will take some time" for Web hosting companies to become profitable.
"I think one of the things they need to do is expand their customer base. The market is going to get more competitive, so it's important for companies to differentiate themselves. To do that, they have to focus on what they do best. Some companies concentrate on certain vertical markets. Others focus on dedicated access," she said.
But Joel Yaffe, an analyst with the Giga Information Group, continued. "(Web hosting company stocks) are drawing interest for the same reason a lot of dot com companies are valued at a lot more than they could hope to earn. People believe in the potential for high growth and that the companies can eventually be profitable."
He added: "Some companies probably won't (become profitable). The ones that do are the ones that specialise in a specific niche or own their own infrastructure."
Digex, which hosts a number of well known Web sites, is one of a number of such companies that has just gone public. It floated its shares last Friday at $17 a share, $1 higher than the top of the $14-16 range set by Bear Stearns and Donaldson Lufkin & Jenrette, which handled the sale, and ended the day up 31 per cent.
This was despite the fact that the company, like most other Web hosting firms, is not yet profitable, despite rapid revenue growth. In the first quarter of this year, it generated revenues of $9.4 million, but lost $8.6 million.
Giga’s Yaffe said: "Whether Digex becomes profitable in the market is a matter of whether it’s independent long enough to accomplish that with its Web hosting services or whether it will change its roadmap."
Two other Web hosting companies, Data Return and Internap, also filed to go public last week. Data Return filed an $86 million offering and Internap for $150 million.
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