A photo caption on Page 15 of last week's issue incorrectly characterized Network Solutions Inc. CEO James Rutt's history with the company. He came to the company last May from Thomson Corp. Network Solutions Chairman Michael Daniels acquired Network Solutions for Science Applications International Corp. in March 1995. (Published 01/03/2000)

Back in 1995, when the word "Internet" was just entering the national vocabulary, executives of a government computer contracting firm called Science Applications International Corp. saw a chance to invest in the emerging technology.

For $5 million, SAIC bought a little Herndon firm that had a contract with the National Science Foundation to distribute addresses to users of the Internet and to maintain the central registry -- the equivalent of the phone book for the Internet.

There were 340,000 names in the Internet directory then. Now the list is approaching 8 million -- every one of them pays an annual fee to the list-keeper, Network Solutions Inc.

With the number of Internet addresses more than doubling every year and Network Solutions' revenue growing right along with them, SAIC's purchase of the company has turned into one of the decade's most spectacular Internet investments in a region rolling in Internet stock zillionaires.

That $5 million investment today is worth $4.5 billion to $5 billion -- counting the money SAIC already has collected by selling Network Solutions stock, money it hopes to get by selling some more shares next month and the value of the 22 percent of the company it will still own.

"There probably is no other stock that is as representative of the growth of the Internet as Network Solutions," said Robert Fagin, an Internet analysts at Bear Stearns & Co.

The price of Network Solutions stock has tripled in the last two months as investors have gone on a technology stock buying spree that calls to mind the tulip mania that swept Holland in the 1630s.

In the week ended last Wednesday, prices of Internet stocks went up 8 percent -- giving investors a better return than they can get if they hold U.S. Treasury bonds for a year.

Since late October, investors have been grabbing tech stocks as though they were stocking stuffers, producing a year-end surge that made 1999 the best year ever for tech stocks. In the District, Maryland and Virginia, the stocks of 30 firms have doubled since last Dec. 31. Only one of them was not a high-tech issue: U.S.-China Industrial Exchange Inc., a Bethesda company that exports medical equipment and stands to gain from removal of trade barriers with China.

Though a mobile phone company, Omnipoint Corp. of Bethesda, was the year's top stock and five biotech firms made the list, all the rest are companies involved with computers, software, communications and the Internet.

"On a fundamental level, the market is telling you that people believe in the Internet revolution," said Internet-watcher William Wyman of the Washington-based Legg Mason Precursor Group. "The market is right in saying the Internet is fundamentally changing business models. In the long run, it is an enduring and real phenomena."

"But in the short term," he added. "You have some crazy things going on."

One of those crazy things is that in their enthusiasm to buy Internet and other technology stocks, investors have bailed out of just about everything else, sending prices of those stock spiraling downward.

"Most stocks are now in a bear market that is accelerating on the downside," Merrill Lynch & Co.'s chief investment strategist, Charles Clough, told the firm's clients in his latest weekly update on the market. "Everyone, including ourselves, is playing technology, because tech is the only sector of the marketplace still standing."

And with investors buying tech stocks -- and sending their value higher -- because they're the only game on Wall Street, another "crazy thing" is happening: Stock prices are swinging up and down faster than ever before. "Increased volatility," the traders call it.

As Wyman points out, there are only a limited number of solid technology stocks. Some investors are responding to the shortage by grabbing anything that remotely resembles a solid stock, turning several local penny stocks into respectably priced issues. Another response to the shortage is to create more tech stocks through a record number of initial public offerings -- two dozen of them this year in the District, Maryland and Virginia.

But mostly the shortage of high-quality tech stocks is producing the same response as shortages of anything else -- higher prices. Too much money chasing too few goods is the classic economics formula for inflation. On Wall Street, however, that's the classic formula for a bull market -- or to the more skeptical, a speculative bubble, a 20th-century tulip mania.

The year's best example of how a thinly traded stock can be squeezed skyward by an uptick in orders came Dec. 6, when shares of MicroStrategy Inc. jumped nearly $48 a share in a single day. The leap, to $183.87 1/2 from $146, added $1 billion to the net worth of MicroStrategy Chairman Michael Saylor, who has become the poster boy for Washington techno-entrepreneurs. Saylor has sold only about 20 percent of his company's shares to the public. Though he might rake in more cash by selling another batch, the limited supply helps keep up the price of the stock he owns.

Further fueling the overheated tech stock market are two technological developments in the stock trading system itself: the rise of "index investing," which attempts to match the performances of closely watched market measures, such as the Nasdaq 100 index or the Standard & Poor's 500-stock index, and the boom in day trading.

The most certain way to keep up with the S&P 500 is to invest in the stocks that are driving the index. That creates additional demand for any stock that becomes a member of an index. When Network Solutions was added to the Nasdaq 100 on Dec. 20, the stock jumped almost $19 a share.

Long-term investment goals like keeping up with the S&P are scorned by the new breed of day traders, especially the amateurs investing over the Internet. All they want are stocks that are going up -- so they can jump on 'em, ride 'em up and jump off with a profit. Thus, any tech stock that starts to climb now climbs further and faster than it would have in the past.

That practice harks back to the end of tulip mania as described by Charles Mackay in the classic work on boom-and-bust cycles, "Extraordinary Popular Delusions & the Madness of Crowds."

"At last, the more prudent began to see that this folly could not last for ever." Mackay writes. "Rich people no longer bought the flowers to keep them in their gardens, but to sell them again at a profit."

Not even the most operatic advocates of the tulip mania analogy expect tech stocks to crash like the bulbs did, but there is a virtual consensus that tech stocks in general and Internet stocks in particular will turn down next year.

Some market watchers are even hoping for it. "It's critical that the economy slow down," said M. David Testa, chief investment officer for T. Rowe Price Associates Inc., the Baltimore investment company that manages $100 billion in mutual funds.

At the firm's recent investment outlook conference, Testa noted that a relatively small number of stocks, mostly tech issues, are keeping the market up. That is certainly true in the Washington area, where 2 of 3 stocks are down for the year. The Washington Post-Bloomberg regional stock index is up just 5.4 percent -- and that's only because of the heavy mix of tech companies among the 220 stocks in the index.

Testa said the market's dependence on a limited number of tech stocks is "a warning signal and it has reached a point where it's quite extreme."

Using the kind of "data mining" techniques that made MicroStrategy Inc. the region's hottest stock this year, Wall Street researchers ponder the patterns of the market like prophetic tea leaves, seeking signs of what will happen next.

At Solomon Smith Barney Inc., for example, the "quants" -- as in quantitative analysts -- have found that weakness in utility stocks often forecasts a downturn in the Dow Jones industrial average and broader market measures. Drawing charts that might as well be electrocardiograms to non-quants, they say they see signs that "suggest a possible pullback, a consolidation, or correction. Such an event would be welcome for more rational souls, such as we."

That firm's chief equity strategist, A. Marshall Acuff Jr., describes the current prices of Internet stocks as "uncharted territory," citing America Online Inc. as an example.

Wall Street once had a rule of thumb that said the ratio of a stock's price to its earnings should be about equal to its growth rate. If a company is growing by 30 percent a year, its stock should be worth 30 times the firm's annual profits.

That 1-to-1 correlation between the price/earnings (P/E) ratio and the growth rate was considered outlandishly optimistic only two or three years ago, but after this year's tech stock stampede, it sounds old-fashioned and understated. Internet issues have P/E ratios that are two, three, even four times higher than growth rate.

Turning to America Online Inc., the region's most successful Internet company, Acuff said that instead of a 1-to-1 ratio, AOL's P/E was 3.1 times its growth rate as of Dec. 14.

Ironically, AOL is considered one of the safest, most dependable Internet stocks by most analysts. Legg Mason's Whyman, who has come up with a formula for valuing World Wide Web companies based on customer loyalty, calculates that AOL and Yahoo Inc. are the only two that meet his standards for staying power.

While the best Internet stocks still can become overpriced, Whyman said, he rejects the tulip theory. "I don't find that a particularly helpful comparison," he said.

High-priced Internet stocks pose a particular dilemma for analysts who work for brokerage firms. Their job is to find stocks that brokers can recommend to their clients as good investments. That puts them in an awkward spot when they begin to suspect that good stocks have gone too high.

Though both New York and regional firms continue to rate most Internet stocks as "buys," words of caution come through clearly in their year-end assessments and year-ahead projections.

"The valuation level the marketplace has assigned to many of the pure-play Internet issues becomes a point of significant risk," Acuff said. "The expectations built into analysts' models to sustain these valuations leave little margin for error for the companies."

Even BancBoston Robertson Stephens Inc., which has a San Francisco-based "Internet stock team" with members who often are considered cheerleaders for Silicon Valley, issued a Christmas Eve warning that Internet stocks could slip "between now and mid-February.

"We expect a downturn of 15% to 40% in that time frame as investors digest recent large gains and upcoming quarterly results," the firm said. Ever optimistic, the analysts noted that such a hit "won't matter much if the stocks are up 25% in the last two weeks of December."

Closer to home, Ulrich Weil, the eminence grise Internet guru of Arlington-based Friedman, Billings Ramsey Group Inc., projects a similar timetable for an Internet stock correction.

"The Santa Claus rally," as Weil calls it, will continue into mid-January. Historically, early January is a pretty good period for the stock market, he said, and this year Wall Street firms will be paying a record $18 billion in bonuses, a lot of which will go right back into the market.

But after that? "Then I think we're going into tricky times," he said. "The market is hugely overvalued by any rational person's standards."

"There are variables here after the middle of January that could argue there will be a 10 percent correction sometime in the first quarter."

Beyond mid-January, however, Weil is sanguine about tech stocks resuming the cycle seen over the past several years. "My view is that once the correction has been taken care of, we'll go back up again in the spring and summer," he said. "We could have another summer correction, then into the fall, another rebound."

The bottom line for 2000 from forecasters at Friedman, Billings, Ramsey: "It'll be a good year. It won't be the kind we've had this year."

Regardless of the overall trend next year, different kinds of high-tech and Internet companies are expected to gain favor next year, a trend that bodes well for the Washington region's Internet industry.

Already fading are many of the Internet merchants -- "e-tailers," as they've come to be known. In the rankings of this year's initial public offerings, the region's only e-tailer comes in dead last. Shares of ValueAmerica Inc. of Charlottesville are down 69 percent from their offering price.

As surely as New Year's Day follows Christmas, an e-tailing shakeout is coming. Many online merchants are spending their last dollars on holiday gift-giving advertising, figuring that if they can't attract customers this year, they won't get another chance.

While BancBoston Robertson Stephens's NetDex index of Internet stocks keeps hitting new highs, its eTailDex of online merchants is falling, down 1 percent last week, 5 percent the week before.

The dwindling interest in e-tail stocks has held up the planned IPO of VarsityBooks.com, a Washington company that sells college textbooks online, and could deter local online pharmacies and cosmetic stores that hope to go public.

With Internet retailing fading from fashion, Internet "infrastructure" companies have moved to the top of the best-selling stocks lists. "Infrastructure" is broadly defined to include not only companies involved with the physical infrastructure of the Internet but also firms with software and services that are used by companies taking their business into cyberspace.

The top IPOs virtually all fit the Internet infrastructure category: Proxicom Inc., Aether Systems Inc., Digex Inc., TeleCorp PCS Inc., Cysive Inc., AppNet Systems Inc. Only LifeMinders.com Inc., which provides e-mail reminders of birthdays, anniversaries and other events and publishes advertising-supported online newsletters, is one of the hot IPOs that directly targets consumers.

The "infrastructure" label fits several of the region's big winners this year: Netrix Corp., up 600 percent, makes computer networking equipment. Ciena Corp., up 296 percent, makes high-capacity fiber-optic communications gear. PSINet Inc., up 210 percent, owns Internet circuits and switches. Excalibur Technologies Corp., up 251 percent, sells software used for searching the Internet.

But toward the bottom of the regional Top 40 is an Internet infrastructure play -- Optical Cable Corp., even though the core technologies at its Roanoke factory go back to the building of the Brooklyn Bridge.

Optical Cable makes cables -- glass-fiber cables. They're not all that different from the steel cables spun a century ago to carry suspension bridges, but today they can link together Ciena's signaling devices to form the kind of networks used by PSINet to carry traffic from AOL members to Web sites created by customers of Cysive, AppNet or Digex customers.

Those are the connections that counted this year, which in the next millennium will be recorded as the year of the Internet stocks.

MICROSTRATEGY founder Michael Saylor has become an instant billionaire and the model for Washington's high-tech entrepreneurs, but most investors still aren't sure what his "data mining" company does. Behind the hot stock is a hot concept -- the company's proprietary work station is shown here -- and a team of stock-optioned nerds who make it work. MicroStrategy's work is finding needles in haystacks -- crunching through millions of bits of information to spot patterns.

NETWORK SOLUTIONS chief executive James Rutt was working for Science Applications International Corp. in 1995 when the California defense contractor decided to spend $5 million to acquire the small Herndon company that did the bookkeeping and household chores for something called the Internet. Rutt and a handful of other executives brought SAIC's highly entrepreneurial culture to Network Solutions and transformed the company from a performer of clerical duties into one of region's prime players in the Internet sector. The government has taken away Network Solutions' monopoly on issuing Internet addresses, but the firm has a huge lead over its new competitors.

AETHER SYSTEMS founder David Oros found a way to allow all kinds of portable computing and communications devices to talk to one another -- by linking up to what amounts to a multilingual magic box made by the Owings Mills, Md., company. Eager investors bid up the stock to $48 from $16 on the first day of trading in October. Since the offering, the stock is up 269 percent.

PROXICOM founder Raul Fernandez likes to call his company "the architects of the new economy." He's talking not about bricks and mortar, but about "systems architecture" that creates the structure for large companies moving into electronic commerce. Much more than a World Wide Web site builder, Proxicom reconfigures the operations of clients such as GE Capital Corp., Mobil Corp. and BMW to take maximum advantage of the Internet. Proxicom's next target is wireless data for which it has formed a partnership with Ericsson, the big European telecommunications company.

The Top 40

Thurs. YTD

Company Symbol close RETURN

Omnipoint Commmunications OMPT $103.81 1/4 1014%

Netrix NTRX 16.61 1/2 600%

MicroStrategy MSTR 175 455%

U.S.-China Industrial Exchange CHDX 14.87 1/2 441%

LCC International LCCI 16.81 1/4 348%

Nextel Communications NXTL 105 344%

Ciena CIEN 58 296%

Network Solutions NSOL 250.25 282%

Human Genome Sciences HGSI 136 282%

Excalibur Technology EXCA 21.50 251%

Gene Logic GLGC 24 244%

Template Software TMPL 15.12 1/2 238%

Digene DIGE 18.37 1/2 230%

Intelidata Technologies INTD 4.31 1/4 228%

American Mobile Satellite SKYC 17.12 1/2 226%

PSINet PSIX 64.81 1/4 210%

MedImmune MEDI 150 202%

Novavax NOX 5.75 196%

Diehl Softgraph DIEG 7.75 188%

ePlus PLUS 23.62 1/2 164%

Manugistics Group MANU 32.31 1/4 158%

CoStar Group CSGP 30/12 1/4 139%

TFC Enterprises TFCE 3.81 1/4 134%

Treev TREV 3.73 3/8 125%

Primus Telecommunications PRTL 36.43 3/4 120%

Teligent TGNT 62.50 117%

America Online AOL 81.50 110%

Information Resource Engineering IREG 19.50 109%

V One VONE 6.03 1/8 103%

Interstate General IGC 7.62 1/2 103%

Integral Systems ISYS 39 101%

Startec Global Communications STGC 19.12 1/2 99%

Micros Systems MCRS 62.25 89%

Visual Networks VNWK 69.50 85%

Circuit City CC 42.25 69%

GRC International GRH 10.43 3/4 65%

Group One Software GSOF 13.12 1/2 64%

Telebanc Financial TBGC 27.06 1/4 59%

Optical Cable OCCF 19.37 1/2 59%

Martek Biosciences MATK 12.25 53%

SOURCE: Bloomberg News

Class of 1999

Company

IPO date

Offering

Thurs. close

% increase

Proxicom (PXCM)

4/19/99

$13

$95.75

636%

Digex (DIGX)

7/29/99

17

74.50

338%

USinternetworking (USIX)

4/8/99

21

57.87 1/2

313%

LifeMinders.com (LFMN)

11/18/99

14

56

300%

Aether Systems (AETH)

10/20/99

16

59.06 1/4

269%

Radio One

(ROIA)

5/5/99

24

88.50

268%

AppNet (APNT)

6/17/99

12

43

258%

Cysive (CYSV)

10/14/99

17

59.12 1/2

247%

United Therapeutics Corp. (UTHR)

6/16/99

12

36.25

202%

Network Access Solutions (NASC)

6/3/99

12

36.12 1/2

201%

Corporate Executive Board (EXBD)

2/22/99

19

56.25

196%

XM Satellite Radio Holdings (XMSR)

10/4/99

12

32

166%

Trex (TWP)

4/7/99

10

26.37 1/2

163%

TeleCorp PCS (TLCP)

11/22/99

20

36.96 7/8

84%

CAIS Internet (CAIS)

5/19/99

19

33.93 3/4

78%

NCRIC Group (NCRI)

7/28/99

7

8.75

25%

Online Resources & Communications (ORCC)

6/3/99

14

13.56 1/4

- 3%

HealthExtras (HLEX)

12/13/99

11

10.37 1/2

- 5%

Musicmaker.com (HITS)

7/6/99

14

6.90 5/8

- 51%

CareerBuilder (CBDR)

5/11/99

13

5.87 1/2

- 54%

Greater Atlantic Financial (GAFC)

6/24/99

9.50

4.25

- 55%

ValueAmerica (VUSA)

4/7/99

23

7.75

- 66%

SOURCE: Bloomberg News

Tulip Mania

For a brief history of Holland's tulip bulb price crash of 1637, go to the International Bulb Society's World Wide Web site: http://bulbsociety.com. Under the direct links menu, click on "Lore" then on "Tulipmania."