Getting Rich: A Retrospective

Do you remember what you were up to in 1995? Better yet, do you remember what the rest of the world was up to? The Dow Jones Industrial Average closed above 4,000 for the first time ever, while the Nasdaq set a new record for exceeding 1,000. Microsoft (NASDAQ:MSFT) released Windows 95. The World Trade Organization was formed. O.J. Simpson was on trial for murder. James Bond returned to the big screen in GoldenEye after a six-year absence, and Toy Story delighted audiences as the first feature film that relied entirely on computer-generated images.

If you peek at your own time capsule, I'd venture to guess you weren't thinking about buying stuff "online." At that time, most people had little expectation of -- maybe even little interest in -- having the Internet and email available on their home computers (if they even had home computers!). However, something had recently happened to change all that: Netscape's release of its Navigator product in 1994 was one of the huge disruptive shifts that heralded the mainstream Internet age.

Even so, in 1995, e-commerce was still a pretty outlandish concept. As a matter of fact, National Science Foundation statistics show that in 1994 only 2% of U.S. households had Internet access at all, much less could fathom the idea of putting their credit card numbers into the "ether" of the Internet.

Regardless, that year a programmer in his late 20s named Pierre Omidyar dreamed up an online virtual flea market. He was inspired by the idea that everyone involved -- even those separated by great distances -- would have equal access to information in buying and selling goods, all over the Internet. (Legend has it he was inspired by his fiancee's interest in collecting Pez dispensers, but the end result was the same.)

A flea market, a bazaar, a virtual yard sale -- it was a high-tech concept with grassroots appeal. Could buying and selling used stuff dug out of basements or dragged down from attics really be big business? As odd as it may have sounded, the concept caught on like wildfire, and not just with techies, but also with people like your Aunt Mildred, who might not have seemed like early adopters of anything.

Flashback: 1998
Although eBay (NASDAQ:EBAY) was formed in 1995 and incorporated in 1996, it didn't file to go public until 1998. Those were, as you probably recall, the days of the budding Internet boom. (Remember that 2% Internet penetration I mentioned above? In just four years, that number had already burgeoned to 26%.)

Back in 1998, I had a laundry list of reasons why I thought eBay was a crazy idea that would never work. However, even at IPO time, there was proof of the company's strength. Its sales were increasing at staggering rates. Net income was also increasing. The fact that it was a profitable Internet company separated it from the rest.

Still, what with the astronomical valuations given many Internet companies back in those days -- and their subsequent demises -- there was a psychological tendency toward doubt and fear. After all, while eBay did prove its mettle, there were scores of Internet-based companies with highly inflated stock prices that did not live up to their potential. You can probably name a few. The trick, of course, is to separate the wheat from the chaff when you're searching for true high-growth innovators.

Back in the black
When you're looking for high-growth stocks in the Internet space, there are a few rules of thumb to consider. Do these companies:

• Use or create a disruptive innovation?
• Deliver lower prices and greater convenience to consumers?
• Rouse Wall Street's suspicions that their success is not sustainable?

In 1998, you could put a check in each of those boxes for eBay. The Internet was providing the disruptive innovation for a consumer-to-consumer auction business like nothing the world had never seen. eBay delivered bargains and convenience to folks who otherwise would never have connected with one another in the physical marketplace. Many of you remember eBay's strong price appreciation over the years and the scores of Wall Street pundits who called the stock overvalued and risky, particularly after the dot-com boom went bust.

So what companies may replicate eBay's success during the next 10 years? Companies that were part of the first wave of dot-com mania may be reaching their stride. What about Priceline (NASDAQ:PCLN) and Drugstore.com (NASDAQ:DSCM), both of which might have come a little before their time? What about CheckFree (NASDAQ:CKFR), which revolutionized online payments and banking? Or ShandaInteractive (NASDAQ:SNDA), which runs online games in China? Or Chinese Internet play Baidu (NASDAQ:BIDU)?

Some of these companies have been around for a while, and, for a time, they were poster children for disruptive innovation. (Case in point: Priceline's original premise to allow consumers to "name their own price." However, the company has increasingly turned toward fixed-price offerings like those of its rivals, and many of those rivals have copied its model.) Time mellows many things, and some have lost much of their excitement now that Internet services are common.

At this moment, it seems that Shanda is delivering the most compelling product offering. A Motley Fool Rule Breakers pick, it's capitalizing off the disruptive innovation that is the massively multiplayer online role-playing game (MMORPG) space in China, a segment that should grow exponentially over the coming months and years. Although the company may not deliver lower prices, it's offering users an easy and convenient way to get their fix. The subscription-based business is also extremely addictive for users. Is Wall Street suspicious? Sure -- Shanda shares have doubled over the past year, and that kind of activity makes people nervous.

An investor who put money into eBay on its first day of trading paid a mere $1.97 per share for the stock on a split-adjusted basis. That's less than a large cup of coffee at Starbucks today (and trust me, I know, thanks to my coffee addiction). It also adds up to a whopping 1,984% appreciation in stock price for those investors who bought eBay shares in 1998 and held. Even investors who bought shares in, say, August 2001 would be sitting on 195% gains today.

Crystal-ball methodology
What better time than eBay's 10th anniversary to think about other innovative companies and how to get in on them early? What could I have used in 1995 to cut through the uncertainty and see the potential in eBay?

Even if I saw that eBay was a disruptive technology, I still might not have had the confidence to pull the trigger on the stock. It would have been invaluable to have a community of investors at my disposal with whom I could discuss investing. That's how you figure out the winners, debate their potential (or lack thereof), and even sometimes find out about companies you've never even heard of. Such a community could have helped me see the promise in eBay 10 years ago. If you'd like to join that community today, consider a 30-day free trial to Rule Breakers. You'll have instant access to everything we've ever published, and there's no obligation to subscribe. In this case, one of eBay's slogans -- "the power of all of us" -- makes a whole lot of sense.

Alyce Lomax owns shares of Starbucks but of none of the other companies mentioned. eBay is a recommendation of the Motley Fool Stock Advisor newsletter service. The Motley Fool isinvestors writing for investors.