SAN FRANCISCO (CNN/Money) - Wi-fi, a space many thought couldn't get any hotter, actually notched up a few degrees last week with the IPOs of two wi-fi companies, iPass and Netgear. Both fared well on their opening days (not 1999-era well, mind you), earning respectable gains and, for the first few days of trading, doing a decent job of holding on to them.

Consider Netgear, a company that manufactures wi-fi hardware aimed at the home-networking and small to midsize business market. Netgear has its positives -- it's been profitable for the last year and makes quality products. Investors wanting to enter the wi-fi space could do worse than to pick up some Netgear shares.

But since this stock is so closely tied to the technology zeitgeist, it will likely bounce around like a kid in a moonwalk room.

Netgear is a leading manufacturer in an exploding market: IDC estimates that at the end of 2002 there were 9.1 million home networks, with 3.2 million households using wireless technologies.

By the end of 2007, that number is expected to grow to 28.9 million. Public companies in this space should experience a short-term rising tide effect as sales shoot upward for the next several quarters.

But I have several real concerns about the long-term prospects for Netgear and would caution investors against going long on this stock. Have fun with it now, but pay close attention -- this is not an eBay (EBAY: Research, Estimates) or IBM (IBM: Research, Estimates), something you pick up and let simmer a while.

Netgear's biggest problem is, paradoxically, the main reason for its success: It is in a superhot market. And, as is often the case, the big players want a piece.

Two such companies entered the market this year -- Cisco Systems (CSCO: Research, Estimates) (after acquiring Linksys) and Microsoft (MSFT: Research, Estimates). The market-moving behemoths are sharing space with the dilettante companies that blitzed customers with ultralow-cost devices. This can mean only one thing: Wi-fi devices are quickly moving toward commoditization.

Commoditization, of course, is great for consumers, who reap the benefits of price cuts. For companies, however, it requires a strategy shift whereby sales volume must increase inversely to the declining margins.

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"Netgear is going to have to make a decision to add features and [become a premium product] or tweak its manufacturing and sales and go for volume," says Aaron Vance, an industry analyst with Synergy Research Group.

Netgear successfully increased its gross margins during the last two years; 17.6 percent in 2000 gave way to 25.4 percent in 2002. Unfortunately, Netgear is currently losing the sales volume game. Despite its increase in sales, it lags behind Linksys.

According to In-Stat, in the first quarter of 2003, Netgear's sales were less than half those of Linksys. In the same quarter, Linksys commanded 33 percent of the market, while Netgear came in second with 14 percent.

And though the home-networking market is booming for now, its growth will slow.

"Home networking is a hot area right now," says Jonathan Gaw, an IDC analyst. "But in some ways, it's getting to be like the modem market, where eventually everyone knows how to do it. And so it'll be difficult to charge a premium for it."

Fortunately, two corollary markets are developing for wi-fi device makers, although one is already crowded and one is in a nascent stage.

First, ISPs are partnering with wi-fi device manufacturers so their customers can sign up for broadband service and purchase the equipment directly from the ISP. Earthlink (ELNK: Research, Estimates) is teaming with Linksys, and SBC (SBC: Research, Estimates) has a deal with manufacturer 2Wire. Netgear will need to pursue partnerships aggressively.

The second boon will come when home electronics manufacturers enhance products such as stereos, televisions, and video game consoles by adding wi-fi capabilities, but that's a few years off, observers say.

Will Netgear be a dominant player when that market booster finally arrives? Perhaps. But to be one, it will need to clear a number of significant and fast-approaching hurdles.

The wi-fi device market is obviously experiencing a boom right now, but like the tech boom of the '90s, it likely won't last long.

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