Network Engines Takes Off on Debut

Updated from 1:20 p.m. EDT

Shares of Network Engines (NENG Quote - Cramer on NENG - Stock Picks) finished up 71% after they made their stock market debut on Thursday, showing that investors now reward only those new issues that can stand up to intense scrutiny.

Network Engines was trading up 10 5/8 at 27 11/16 by early afternoon. Its initial public offering was priced at $17 a share, at the top of the $15 to $17 range that had already been increased. Network Engines finished Thursday regular trading up 12, or 71%, at 29. The number of shares offered to the public was also increased, to 6.5 million from 5.5 million, enabling the company to raise $110.5 million with the issue.

Based in Randolph, Mass., Network Engines is part of the emerging market server appliance market, which is projected to enjoy 70% annual growth over the next five years. "We like investing in companies that are building the information superhighway," said Yusuf Haque, an analyst at the financial information portal 123Jump.com.

Network Engines creates specialized Internet servers, which dish out information over the Web, at a faster rate and lower cost than the multifunctional servers developed by such companies as Sun Microsystems (SUNW Quote - Cramer on SUNW - Stock Picks).

"Because they only do one function, their servers perform at a higher level than a general purpose server that has a lot more applications involved," said Paul Bard, an analyst at Renaissance Capital. "And since they're focused on one particular market, generally the price point is lower."

And though the company is not currently profitable -- having lost $5.8 million on $10.5 million of sales for the six months ending in March -- it did post a profit back in 1996. In any case, "it's in such a rapid growth segment that this is not something I would worry about as an investor," Haque said.

In terms of competition, Bard said, "the market's wide open and really new." Network Engines has only two direct competitors, Cobalt Networks (COBT Quote - Cramer on COBT - Stock Picks) and Network Appliances.

That's good news, but on the flip side, Bard noted that the major server manufacturers such as Dell (DELL Quote - Cramer on DELL - Stock Picks) and Compaq Computer (CPQ Quote - Cramer on CPQ - Stock Picks) recognize the demand for specialized servers and are starting to develop their own products.

George Nichols, an analyst at Morningstar.com, also worries about the company's concentrated customer base. "IBM (IBM Quote - Cramer on IBM - Stock Picks) and Microsoft's (MSFT Quote - Cramer on MSFT - Stock Picks) WebTV are great clients to have, but if they generate 44% of sales, the company needs to find more customers," he said.