Internet Investors Look Increasingly Overseas

Forget about Yahoo! (YHOO Quote), eBay (EBAY Quote) and the rest of your Silicon Valley darlings. When it comes to making real money on the Internet, look overseas.

See Also
The Anglo File: Framlington's Global Internet Fund Revolves Mostly Around U.S. Holdings

That's what an increasing number of mutual fund managers are saying about the future of Internet investing. With Internet penetration still relatively low in Europe, Japan and greater Asia -- less than 10% vs. more than 30% domestically -- portfolio managers say international markets are ripe for the kind of explosive growth U.S. markets saw a few years ago.

"I think it's getting a little late in the game" in the U.S., says Richard Driehaus, founder of Driehaus Capital Management in Chicago. "But there's a lot of potential overseas because of the attempt to copy the American model. There definitely is a longer-term shift that's under way, and it could be one of relatively high magnitude."

Analysts point to countries such as Japan, where only 14 million people are currently on the Internet. That number is expected to grow to 69 million by 2005. And in greater Asia, the Internet's growth potential -- coupled with a tech-loving culture -- makes money managers gush when it comes to talking about the Internet in the region.

"Consumers in Asia love brands, they love electronics and they love gadgets," says Royce Brennan, managing director of Investec Guinness Flight Global Asset Management. "The Internet is absolutely poised to see tremendous growth in Asia."

Asked about the best overseas Internet plays, money managers cite what would be considered, in the U.S., the usual suspects: infrastructure, portals, Internet service providers and surefire e-commerce plays such as online brokerages.

Brennan, for example, likes infrastructure plays.

"We like the suppliers of the hardware," he says, ticking off companies such as integrated-circuit maker Taiwan Semiconductor Manufacturing (TSM Quote), Taiwanese semiconductor foundry UMC Group, Korea's Samsung Electronics and electronics producer Venture Manufacturing in Singapore.

Driehaus likes China.com (CHINA Quote), China's dominant portal and content provider, which it holds in the (DRIGX Quote)Driehaus International Growth fund. And in Japan, Driehaus holds fast-rising access provider Internet Initiative Japan (IIJI Quote).

In Europe, Germany's ConSors, an online broker that's often compared with Silicon Valley success story E*Trade (EGRP Quote), is a favorite of fund managers like Guy Uding, manager of the ING Internet fund, based in the Hague.

Uding also likes France's Integra, an e-commerce solutions provider, and Switzerland's Fantastic, a provider of real-time media broadcasts over the Internet.

In the battle between homegrown Internet companies and U.S.-based exports, the home team appears to be winning early on, at least on the portal front. For example, America Online (AOL Quote), Lycos (LCOS Quote) and Microsoft's (MSFT Quote) MSN are all scrambling to get a piece of the Japanese portal market. But they're being outgunned by Fujitsu's Nifty and Sony's (SNE Quote) So-net.

"You're seeing more and more [non-U.S.] companies entering the market who are benefiting from the experience of the U.S. Internet companies," says Uding. Many overseas companies adopt a U.S. Internet model, then shape it to the likes of their own countries.

But a notable exception to this rule is Yahoo! Japan, a venture partially owned by its Silicon Valley parent, with a majority stake in the hands of Japanese venture capital powerhouse Softbank. Since its IPO in November 1997, Yahoo! Japan has been a favorite of many international Internet investors, increasing more than 7,700%. In a recent research report, Merrill Lynch analyst Mahendra Negi gave the stock an accumulate rating and said, "We believe that Yahoo! Japan is in an even stronger position in Japan than its parent is in the U.S."

U.S. Isn't Finished Yet

Of course, not everyone's convinced that all the big money has already been made domestically in Net stocks.

"We're still in the first minute of the first round" domestically, says James Punishell, an analyst with Forrester Research in Cambridge, Mass. "There's a ton of infrastructure that still needs to be built, and there's all kinds of businesses that are still incredibly inefficient that need to be completely redesigned."

Ryan Jacob, president of Jacob Asset Management and the former manager of the (WWWFX Quote)Internet fund, says he plans on staying in the U.S. when he launches his new fund, Jacob Internet, later this year. Whether people worldwide will embrace the Internet as quickly as Americans have is a large unknown, he says.

Frits Moolhuizen, director of equities at ING Investment Management in the Hague, agrees. "It will be slower in Europe, because investors are not as familiar with technology as investors in the U.S.," Moolhuizen says. "I think it's very difficult to say yet that there's an entire [Internet] industry in Europe."

That may very well be true. But it wasn't too long ago that there wasn't an Internet industry in the U.S., either. And until earlier this year, only four mutual funds invested specifically in Internet companies. Now, more than 20 do so or plan to. Analysts now put Europe about two years behind the U.S. in Internet development and Asia at three to four years behind.

In Uding's view, the Internet and global business prospects go hand in hand.

"You have to treat the Internet as a global thing," Uding says. "It's not only in the U.S. It's a global medium -- and a global network."