Dot.com mania has made multi-millionaires of the Riverdeep promoters and some of the early investors in the Internet education company. But the outlook for investors who bought shares after the flotation may be much less rosy because at current levels, the shares look very highly valued.

The trouble with emerging Internet companies is that most of them have not yet produced profits; generally, they are carrying hefty accumulated losses. Their market values are being driven by expectations of future profits which in many cases will not be realised. There will be winners and losers, and investors need to assess each company carefully before buying its shares.

Where an Internet company fails to meet the market's performance expectations, its shares will fall as dramatically as they have risen and those who will take a bath are the small shareholders whose only opportunity to buy the shares comes after they have been floated.

Less likely to suffer are the promoters who, while they will lose previous paper gains, are likely to have consolidated some gains through selling shares at various stages as the company raises funds.

Other likely winners are the shareholders, who, as clients of the stockbrokers bringing the company to the market or of private banks, get the opportunity to buy the shares before they come to the market. These shareholders get to buy the shares at a discount and can sell them after they go on sale to the market, often making significant profits for the lucky few in the process.

So, investors and potential investors need to examine each Internet offering to assess the likely winners and losers. But this is very difficult in an environment where technology is evolving rapidly and new net companies are constantly emerging.

Riverdeep specialises in electronic educational services. Its shares started trading in Dublin and on the Nasdaq in New York on Thursday. In Dublin, the shares opened at €3.48 and jumped 164 per cent to close at €9.20. On Nasdaq, the American Depository shares jumped from a float price of $20 to close over three times ahead on $66.9 at the end of the first day.

At this closing price, the market has valued Riverdeep at $1.8 billion. Set up in late 1995, Riverdeep produces interactive mathematics and science courseware supplied electronically through CD-Rom or over the Internet. So far, the company has accumulated losses of $32 million, some $20.8 million of which was in the six months to end-December 1999. In its prospectus, the company pointed out that it expected to incur net losses for "the foreseeable future" as it spends to build brand awareness and develop its products. It pointed out that its ability to become profitable depends on generating and sustaining significantly higher revenue while maintaining reasonable expense levels.

Riverdeep is still at a fairly early stage of development - its Destination Math suite was introduced only at the beginning of 1999 - and it is in the process of shifting its distribution strategy from CD-Rom to the Internet. It needs to increase its revenue dramatically if it is to become profitable.

The company has not hidden the risk factors involved in developing the operation. These range from business and product risks to marketing, sales, operational and financial risks.

Among the business and product risks are possible failure to transfer existing users of its products from a licensed CD-Rom delivery system to subscription-based Internet delivery and possible difficulty in generating incremental revenue if advertisers and sponsors are not interested in using Internet educational settings.

There is also a risk of failure to achieve commercially viable full webenablement of its products and failure to make strategic partnerships and acquisitions. All of the above risks have implications for the group's potential to increase revenue.

Marketing and sales risks revolve around trying to attract and retain new customers in the target market of schools and schoolchildren from kindergarten age to 12th grade. The company's market, comprising more than 46 million students, 2.7 million teachers and 42 million parents, is competitive, with a number of suppliers. Competition is expected to intensify due to the low barriers to Internet entry and possible moves by traditional school textbook suppliers to deliver by Internet.

For Riverdeep, the prime factor for building customers will be the quality of product content and its relevance to curriculum as well as its ability to build longterm relationships with teachers. At the operational level, the complexity of its software makes it vulnerable to defects and bandwidth limitations. And the company has identified as possible risks the security of the networks and the ability of third parties to provide the services it will require as the business grows.

Less risky for Riverdeep is its dependence on continuing growth in the use of the Internet by schools and students. Internet use is increasing exponentially and rising US government spending on infrastructural technology and Internet access for schools should assist Riverdeep. Riverdeep, which was established as a by-product of majority shareholder Mr Pat McDonagh's CBT Systems (now Smartforce), is trying to achieve the growth it requires by differentiating its product and delivery in the marketplace and by making alliances to add to its product range and the functionality of existing products.

How well it will do this remains to be seen and will depend on its technical and marketing strengths.

But adding value for the shareholders who have come in this week at up to $66 per share will be challenging. At a market capitalisation of $1.8 billion, Riverdeep is valued at more than 140 times its prospective revenue for the year to end-June and 70 times its projected revenue for the year to end-June 2001.

This is a significant premium to other e-leaning companies. Smartforce is valued at about 17.5 times its 1999 revenue, while Advantage Learning, which sells into the public school system like Riverdeep, is valued at just under five times revenue.

As a developing company, Riverdeep is not expected to come into profit until the third quarter of 2002. Company broker Davy is forecasting net profits of just $1.3 million for the year to end-June 2002. For the current year (to end-June), the broker is forecasting a net loss of $32 million, followed by a loss of $21.4 million next year.

Riverdeep investors should not depend on receiving their return in the form of dividends. The company has made it clear that it intends to retain future earnings to fund its growth, and development will not "pay cash or other dividends for the foreseeable future".

For investors interested in Internet or high-tech shares, the bottom line is to be discerning. Try to find out as much as possible and develop an understanding of the company and its prospects for success. Above all, avoid rushing indiscriminately into any share carrying the dot.com label.