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Goodbye, Y2K; Hello, Commerce Dot-Com

Companies are expected to spend heavily to exploit the Internet's business potential as problems with the bug are resolved.


Can you envision a world without the Y2K computer bug?

Wall Street can. Now that the first half of 1999 is history, technology investors already are looking toward next year.

And here's what they see: Companies worldwide, no longer forced to plow money into year-2000-related computer repairs, go full-throttle to develop Web sites and sell products over the Internet.

"The dollars that are freed up from [Y2K] are going to go right into the Internet," said Ron Elijah, head of Elijah Asset Management in San Francisco.

That could be welcome news to holders of individual tech stocks and tech mutual funds, who already have enjoyed stellar returns in the first six months of 1999. Tech funds jumped 14.3%, on average, in the second quarter and are up a startling 34.4% year to date--more than three times the 10.8% gain of the average U.S. stock fund.

Though many companies have already spent considerable sums creating Web sites, much corporate attention and money also have been diverted over the last two years to dealing with the Y2K threat--the risk that many computers wouldn't recognize the 2000 date, triggering malfunctions or total shutdowns.

Now, assuming that most upgraded domestic computer systems make the transition to 2000--despite much debate, most experts believe they will--some professional investors foresee a huge spending push by corporate America on electronic commerce.

Why all the focus on Web sites and e-commerce? Because all sorts of bricks-and-mortar companies have become convinced that e-commerce is essential to reaching new customers and keeping old ones.

What's more, business-to-business e-commerce will expand significantly, experts say. For example, a company might set up a Web site for customers to send in orders and track the resulting inventory as it reaches their stores.

"It's a massive market," said Mark McCall, a money manager at TradeStreet Investment Associates, a unit of Bank of America. "It's a lot more than All of corporate America is worried they're going to fall behind" in e-commerce.

Roger McNamee, general partner at technology investment firm Integral Capital Partners in Silicon Valley, said, "A decision to slow spending on e-commerce is a decision to lose market share."

The push into e-commerce is already evident at many major companies.

Consider Wal-Mart Stores: On Thursday it signed a deal for Books-a-Million (ticker symbol: BAMM), the country's third-largest bookstore chain, to supply books for Wal-Mart's expanded online store.

The emphasis on Web business is perhaps best illustrated by companies that have spent so much on it that their earnings have suffered.

Shares of Starbucks, for example, plunged 28% on Thursday after the coffee giant said 1999 profit would fall shy of estimates, largely due to spending on Internet ventures.

First Union, the nation's sixth-largest banking company, has twice cut its 1999 profit estimate, in part blaming the shortfall on the $150 million it is spending this year to develop an Internet bank.

Microsoft, Oracle Expected to Benefit

Which technology companies have the most to gain from this e-commerce spending windfall?

Start with the familiar software names, experts say. "Companies like Microsoft (MSFT) and Oracle (ORCL) will sop up a lot of the [post-Y2K] spending because they're big and they're paying attention," said Kevin Landis, co-manager of the Firsthand Technology Value fund.

Computer-networking and telecommunications companies also will benefit from the growing demand for faster Web access to speed e-commerce along.

Dave Barnard, a technology fund manager at the AIM mutual fund group in Houston, likes networking leader Cisco Systems (CSCO), telecom systems giants Lucent Technologies (LU) and Tellabs (TLAB), and online-access leader America Online (AOL).

Meanwhile, Barnard notes that AT&T (T) has gobbled up cable giants Tele-Communications Inc. and MediaOne, in part because high-speed cable lines are key to bringing fast Net connections to consumers.

"They've transformed themselves in a very short time from Ma Bell to Ma Cable," Barnard said.

Web site developers and companies that help others use the Net to better manage their operations also should fare well, Landis said. He likes I2 Technologies (ITWO), which makes "supply-chain" software for companies to track production and distribution; Pervasive Software (PVSW), a Novell spinoff that makes software for creating Web sites; and Sterling Commerce (SE), which makes software that facilitates online transactions.

Among smaller Net companies, Barnard favors Inktomi (INKT), an Internet search directory company that makes so-called caching software that speeds Net access, and (INSP), which offers content such as stock quotes and news to Internet sites.

McNamee likes Exodus Communications (EXDS), which hosts Internet sites for large companies involved in e-commerce, and Viant (VIAN), a Net consulting firm.

Some Bumpy Times May Be Ahead

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