The frenzy surrounding internet stocks reached a new high on the stock market yesterday when Lastminute.com, a 19- month-old loss-making on-line retailer, said unprecedented demand from investors had forced it to hike the price of its share sale by more than two-thirds.
Financial bookmakers believe the rush for shares in Lastminute could push the company's value towards the £1bn mark when it floats on the stock exchange on Tuesday. The company's two founders, Brent Hoberman, 31, and Martha Lane-Fox, 27, would see their combined shareholdings valued at almost £200m.
Lastminute's announcement came just hours after Gordon Brown urged caution as investors continue to pour money into internet stocks in the hope of making their own instant dot.com fortunes.
Concern is growing within the City of London that newly launched internet companies are becoming overvalued and that a shake-out could cause many of their share prices to fall back significantly or some firms disappear altogether. If that occurs private investors and institutions stand to lose hundreds of millions, if not billions, of pounds.
The chancellor urged caution when asked on BBC Radio 4's Today programme about the surge in investor interest that has seen several young hi-tech firms push long-established brewers, housebuilders and supermarkets out of the FTSE-100 index.
"I said we had got to be cautious and I am cautious in most instances," Mr Brown said. "And in this particular instance obviously people will want to look at the performance of each of these individual companies."
The chancellor's comments came a day after a warning from Howard Davies, the chairman of the City watchdog the financial services authority. Mr Davies said: "These stocks are extremely difficult to value. These companies for the most part have never made a profit, have never paid a dividend, and have no intention of paying a dividend, so the normal basis on which you value a company is no longer relevant.
"When a company is valued more on hope than on expectation, then you can expect it to be a volatile stock. We know from previous experience that many of the companies around at the moment will not be around in three to five years, because there will be a lot of creative destruction in a new economy of this sort."
Alan Greenspan, chairman of the federal reserve board, which sets interest rates in the US, has previously likened investing in internet companies to playing the lottery.
Private investors in particular do not appear to have heeded the warnings. Financial bookmakers said frenzied buying among individuals, rather than the big investment and pension funds, had forced up the price of Lastminute shares.
"This flotation has generated more interest than any of the others," said David Morrison of Financial Spreads. "We just see buyers coming in. This one has really caught the public's imagination."
IG Index believes Lastminute shares could reach 560p by the end of the first day's trading. Morgan Stanley, the investment bank coordinating the float, wants to sell the shares at around 350p each.
City analysts believe Lastminute.com could emerge as a definitive test case of the strength of Britain's fast- emerging internet sector. Young, fashionable and fun, the company is everything that the internet is supposed to be.
Although revenues are growing fast, turnover in the third quarter of last year, which also included the Christmas buying season, totalled just £409,000 on £4.3m of transactions. Many analysts were surprised they were so low when details were released last month.
"Lastminute is a wonderful brand but valuing it at £1bn? That's crazy," one said.
If Lastminute's valuation does reach the £1bn mark, its 28,687 customers will be valued at £34,858 each.
Some sceptical commentators have asked if Miss Lane-Fox could become the Sophie Mirman of her generation. Ms Mirman shot to national fame in 1987 when massive investor demand forced the value of the 30-year-old's Sock Shop retail chain up to £258m.
However, strategic errors and an end to the City's love affair with speciality retailers saw Sock Shop slide into administration three years later.
Individuals who have opted to invest some of their savings in internet stocks have had a rollercoaster ride. A week ago Freeserve, the UK's largest internet service provider, was valued at £9.2bn - putting it above Marks & Spencers, Sainsburys and British Aerospace in the corporate heirarchy. On Monday, competition concerns wiped £1.7bn from its share price and further falls left it worth £6.4bn at the end of trading yesterday.
Individuals who have registered an interest in buying shares in Lastminute.com have until 5pm today to send in their cheques. They have until 5pm tomorrow to agree to buy shares at the new higher level.
