Mad Dash to Nasdaq: A Japanese Internet Play Called IIJ Joins In

Two words: Internet and Japan. That's how investors are explaining the success of Internet Initiative Japan (IIJI) since its Aug. 4 initial public offering.

The stock enjoyed a moderately strong IPO: In its first day of trading in U.S. markets, the stock closed 37% above its offering price of 23. But it wasn't until the Nasdaq caught fire that the stock really took off, rising 125% in the last month with little fresh news, just a growing enthusiasm for Asian Internet plays. On Wednesday, the stock slid 4% to 119 9/16 as the Nasdaq, in a rare recent lapse, failed to set a record.

IIJ's jump illustrates the strange story of how tech stocks, especially those associated with the Internet and telecommunication, have taken flight this year. The Nasdaq Composite's 80% surge in the past 12 months has added $2 trillion to the collective market caps of the component stocks. The bulk of that amount has rushed into shares of tech companies positioned to build the information infrastructure expected to drive the economy in coming years.

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With the rally comes the debate over whether the future revenue and profit growth of these companies can ever justify the ever-rising valuations of their stocks -- and over just how much of these gains reflects fundamentals rather than investor momentum gone haywire. And for IIJ, the debate focuses on whether the company can hang onto gains by delivering on its promise.

Early Start

Given its early start, IIJ might just make it. Investors say the ISP, which currently has few direct competitors, is perfectly positioned to be an Internet powerhouse once the Net takes off in Asia. "It's a first-mover in the second-largest market in the world," says Randall Roth, senior analyst with Renaissance Capital, which runs the (IPOSX)IPO Plus Aftermarket fund. The fund has holdings in IIJ.

Started in 1992 by a group of engineers, Internet Initiative Japan is Japan's largest ISP. The Tokyo-based company connects users to the Internet and provides services such as network consulting and Web hosting for large companies. It owns 21% of the "A-Bone," a backbone network that connects eight Asian countries, and a 40% joint-venture stake with Toyota (TM) and Sony (SNE) in Crosswave Communications, which provides high-speed access in Japan.

Many Americans are turning to the Japanese Internet industry for more growth. Morgan Stanley Dean Witter, which has an outperform on the stock and was an underwriter for IIJ's IPO, expects total ISP revenue in Japan to grow 48% a year by 2005 and Internet users in Japan to increase from 14 million to 69 million during the same period. "IIJ participates in one of Japan's few growing industries -- telecommunications -- and is focused on the fastest growing segment of the industry," Morgan Stanley analyst Paul Saferstein wrote on initiating coverage of IIJ at the end of August.

Promises, Promises

Yet the stock also has its share of risk. The resurgence in Japanese stocks has been often promised and little delivered in recent years. And in Japan, "there's not as much transparency as to who owns what," says Renaissance's Roth. Not so encouraging considering this outfit has yet to make profit, posting a $18.4 million net loss in the three months ended Sept. 30.

Still, the hype is growing around the stock. It surged after a portfolio manager told BusinessWeek that he expected the stock to go to 150. Otherwise, its rally this month appears to have little behind it beyond a demand for Asian ISP offerings in Korea and India.

Amid the hype, money managers still bet that IIJ has much more to offer than just a Web site. "People are going Internet-crazy, but Internet Initiative Japan is much more of a real player," says George Grieg, a portfolio manager with William Blair, which holds shares of IIJ. "They own a real backbone, they do real business Internet service, and they have real assets. In my mind it's a much more substantial company."

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