Overpriced, overhyped and now, thanks to a company called Freeserve, owned by electrical retailers Dixons, over in Britain. Internet stocks are about to arrive and investors are welcoming the phenomenon with open arms.

Companies with no profits and virtually no corporate track record have been achieving multi-billion-dollar market capitalisations in the US for four years, ever since the share price of Internet software supplier Netscape more than doubled in its first two days of trading. British companies are finally getting in on the act.

Last week Freeserve, a subscription-free Internet service provider, announced the details of its float. Initial signals from fund managers in Britain at least, are very positive.

Freeserve shook up the business of plugging consumers into the Net when it started a free service last September. It expects to be worth between £1.3 billion sterling (€1.5 billion) and £1.5 billion when it floats next week, putting the nine-month-old business in the same league as department store group Debenhams and publisher Mirror Group.

Following Freeserve will be at least another three floats: QXL, the Internet auctions company; Exchange Group, an Internet financial services company; and Gameplay.com, an Internet games company to be formed from Wireplay and another Internet games website. Each expects to be valued on multiples of revenue reminiscent of the stock market bubble that preceded the Wall Street crash.

So, should canny investors take the Internet phenomenon as proof that the equity markets are well and truly out of control and heading for a fall?

Internet enthusiasts say no. They argue that the valuations of these companies are entirely reasonable, even without current profits, because they have the potential to revolutionise whole industries - and reap the rewards.

Mr Peter Englander of Apax Partners, the venture capitalist that backed both Exchange and QXL, says: "The valuations are very high on traditional measures, but on the other hand the internet is not a traditional phenomenon."

The City is full of Internet enthusiasts, partly because Dixons, which set up Freeserve, has employed a syndicate of 10 investment banks to market the shares. But even proponents admit there are risks. Mr John Clare, chief executive of Dixons, says: "Of course it's a gamble. The business is not underpinned by a profits stream or a balance sheet."

The Freeserve prospectus has an astonishing 10 pages of risk warnings.

When it comes to the Internet, uncertainty is pervasive. While it is having a revolutionary impact on business, no one knows which companies will end up winners - and share prices will leap and plunge more rapidly than in any other sector as the market's uninformed guesses shift. US internet bookshop Amazon has seen its share price range from $24 (€21.3) to $210 (€186.6) in the past 10 months. The shares now stand at $117.

"The Internet market is a classic fear and greed market," says Mr Christopher Bell, joint manager of the NetNet unit trust run by Framlington.

"You balk at the valuations but if you are not in the market and it goes to a premium you look a bit stupid. The way I look at it is as quoted venture capital. It is risky."

Anyone willing to contemplate shouldering these risks will quickly find each Internet company is different.

All they have in common is the stock market rating that goes with the ".com" many have in their names. "Out of any five internet companies, two will be goliaths, one will be fairly stable and you have to wonder whether two will be around at all in five years' time," says Bell.

The key to reducing the risk is to understand the different forces working on each company - and not to invest in one group alone.

Freeserve, will be the biggest Internet stock in London. Almost everyone in the City seems to think it will give investors an instant profit, thanks to the huge institutional demand and lack of shares. (Dixons is keeping 80 per cent of the company for at least a year.)

Dixons has six stores in the Republic, including one PCWorld and one Currys. It is understood that the 365 full and part-time staff employed here may be entitled to some shares, but the precise details have not yet been worked out.

But there is some scepticism over the longterm future of the share price. Mr John Hatherly, head of research at British fund manager M&G, says: "The key to this one is momentum. If (Freeserve) can keep a very strong market position and be seen to be growing I think people will give it the benefit of the doubt. The problem is that there is no cushion for disappointment."

Freeserve has already disappointed in a small way, with the prospectus showing a slowdown in its astronomical growth rate. And it faces more than 100 challengers to its core business of connecting people to the Internet.

The new strategy aims to make it a "portal", or home on the Internet, like Yahoo or Excite of the US. Competitors are again legion, and there are few barriers to stop even more setting up.

Mr Hugh Grieves, a US fund manager at Gartmore, says the "first-mover advantage" gives Freeserve a chance. "The Internet companies are in a market share grab phase. The number one will survive."

Part of the first-mover advantage is establishing the brand. Freeserve will also be able to buy out smaller rivals because of its huge valuation.

It has begun using its shares as a way of buying "content" to make its website more appealing to customers. Last week it agreed to pay £3.7 million for Babyworld.com, a site for pregnant women. Further projects involve issuing credit cards and selling cheap computers.

After Freeserve, the Internet auction house QXL founded by journalist Mr Tim Jackson, will be the biggest British net stock, with an expected market value of about £500 millon. Just behind that will be the Exchange, at £40 million, with Gameplay.com in the smaller companies arena.

QXL could face a rocky road. US auction house eBay plans to move abroad, and with a market value of $16 billion it has the firepower to blow QXL out of the water.

The Exchange has fewer direct competitors for its business-to-business operation, which provides services and life insurance quotes to financial advisers. But its consumer website, Moneyextra, is operating in a crowded market.

Its plans for an online mortgage broker look less innovative with the announcement by US rival e-Loan, valued at $1.7 billion, that it will be setting up a British operation.

As with all Internet stocks, these companies come with serious health warnings attached. The hoped-for valuations depend on achieving aggressive growth targets.

As Hatherly says: "Investors need to be very aware of what they are investing in - if it dignifies the term investment. Even according these stocks the term `valuation' is to flatter them."