[ Technology Blogs Articles News Reviews ]

www Technoclicks.com
Post Tech Blog Article News Reviews

Top Articles

Dot-coms' song and dance no longer entertains investors

Posted by iMark - 2006-02-04

Blogs. 99-cent music downloads. Podcasts. Phoning home via the Internet. Online social networking. It's the golden age of the Internet.
But you wouldn't know it if you've just been watching Internet stocks. Outside of Google and a few other choice names, it's hard to find an Internet company that gets investors' juices flowing - let alone gets them to pull out their wallets. From a technological standpoint, the Internet has lived up to and even surpassed its wildest expectations. But investment-wise, the recent results have been a disappointment at best.

That's completely opposite from six years ago, when dot-com stocks were exciting, but the companies themselves were largely duds. Today's environment says as much about the Internet itself as about the harsh lessons investors have learned. In 2000, investors were willing to buy an Internet stock on the hopes the company, some day, might have a breakthrough product - or any product at all - and make money. That was before the bubble popped. Now investors need to see real products, real cash flow and real earnings before they'll make a move. Internet stocks have become the ultimate "show me" plays.

"Something has changed (with Internet investing)," says Ryan Jacob, portfolio manager of the Jacob Internet fund. "You don't have the craziness of a wild IPO market."

In many ways, this is a healthy change and somewhat of a return to normal in that companies must show their worth before they can hit up the public for cash to expand. After all, it was the freewheeling IPO craze that sparked one of the biggest speculative bubbles in financial history.

Still, it's clear that even though the Internet as a tool is such a key part of our everyday lives, the Internet as an investment is not. The USA TODAY Internet 50 index, a broad measure of 50 of the most important Internet stocks, gained just 1.0% in 2005. That trailed the 3.0% gain in the broad Standard & Poor's 500 and the 1.4% gain in the Nasdaq composite index, the barometer of tech stocks a whole. So far this year the Internet 50 is up 1.8%, still trailing the Nasdaq's 4.8% gain.

And it's not for a lack of profits. Forty-eight of the current members of the Internet 50 that were public in 2000 have seen their profits as a group quadruple since then. Google and Salesforce.com were private in 2000, so that doesn't even include Google's massive profit contribution.

In fact, Google is a big reason Internet stocks as a group don't look even worse. Without Google's 115% gain last year, the USA TODAY Internet 50 would have lost 8.2%.The e-Consumer 25 sub-index rose 28.6% in 2005, trouncing every major domestic index. Drop Google, and that turns into a 3.3% decline. And this week, even Google's stock succumbed to the gravitational pull when it fell $30.88 to $401.78 Wednesday after shocking Wall Street with a disappointing earnings report.

While Google has been carrying the day, survivors that were once pre-eminent players have petered out, at least in the eyes of investors. Consider eBay, which stormed 119% higher from the end of December 1998 to the end of March 2000. Since the end of 2004, though, the stock has fallen 26%. Many Internet stocks, including Yahoo, are still well below their highs from March 2000 even though the companies are much more profitable now than they were then.

Some Internet companies have resorted to formerly unthinkable lengths to attract investors. Internet access provider United Online even starting paying a dividend, something more associated with slow-growing electric utilities.

Even Google, despite its success on Wall Street, personifies the lingering skepticism investors have with the Internet. The stock didn't get the massive valuation until it delivered several quarters of astounding profit growth. Initially, investors were so skeptical, the company struggled to get its IPO off.

And the stock still isn't getting the respect that you might think the company's performance since its IPO would garner. Despite the fact Google is now more valuable than every media company, including Time Warner, it still hasn't been added to the S&P 500 index.

No easy money, thanks

Gone are the days when young Internet entrepreneurs dream about starting a company, doing an IPO and banging the gavel at the Nasdaq MarketSite. The dot-com boom left a sour taste not only in the mouths of investors, but in those of many entrepreneurs, too. Now, the goal for many is to create an Internet company that's quickly profitable so it can sustain itself and its handful of employees. In short: They don't want your money.

That explains the dearth of new, exciting Internet companies going public. There have been only 31 Internet IPOs in the five years since 2000 ended, says Thomson Financial. That's 393 fewer, or a drop of more than 90%, from the IPOs in just 1999 and 2000, according to IPO data from Jay Ritter, professor of finance at the University of Florida. There are only a handful of Internet IPOs in the pipeline, according to Renaissance Capital. Online retailer Buy.com pulled its IPO late last year. Many were thinking that if that deal got done, it could open the spigot for other dot-com IPOs.

DigiMedia.com is an example of a company that would rather avoid the circus of going public. Based in Wichita Falls, Texas, DigiMedia owns roughly a dozen easy-to-remember Web addresses like recipes.com, chairs.com and moviereviews.com, among others.

When Web surfers type in any of these addresses, they go to a website created by DigiMedia containing links that transport them to other sites. Every time a surfer clicks on one of these links, DigiMedia gets paid by the company paying to be listed on the site.

Scott Day, the company's president, won't disclose how much the company earns but says it's profitable enough to support him and a staff of four employees. What's unique about DigiMedia is that it's dropping out of the whole cycle of getting venture capital (VC) funding, expanding rapidly and then selling itself to the public as an IPO.

"We have no intention of going public," says Day, who drives a Dodge four-wheel-drive pickup, explaining "it's not appropriate for me to drive a BMW in my hometown." Day, who reluctantly agreed to be interviewed, says, "We've talked to some VCs but don't see how that would help."

Day plans to use the cash the company throws off to grow. "It's a real business not trying to impress anyone," he says.

Big guys gobble small fry

The lack of interest in Internet stocks has helped foster change in the industry. Just as many predicted, the early survivors on the Internet only got bigger as even small successful Internet companies sold themselves to the Internet titans, namely Yahoo, eBay and Google.

Google bought four small Internet companies in 2005 alone, each of which could have theoretically gone public just five years ago. One of Google's acquisitions, Dodgeball.com, provides communication tools for cellphones. Urchin Software, another acquisition, makes tools that let website operators track their visitors.

In other cases, private-equity firms are buying Internet companies and gluing them together in investment portfolios, says Paul Wimer, partner at private equity firm Topspin Partners. Small companies know all too well how hostile the market can be, he says. "You don't want to be a small public company," he says. And even Topspin hopes that instead of taking its Internet holdings public, it would be easier to just sell it to a larger Internet company.

It's a sign the ranks of Internet companies continue to concentrate, much like every other nascent industry from railroads to automobiles. "We're talked about consolidation for years," says portfolio manager Jacob. But it's really starting to kick into high gear."

And it's not just Internet stalwarts that are buying up what would have been IPO fodder. Some smaller dot-coms are calling it quits and agreeing to get gobbled up by large old-line companies for rich premiums.

Giant traditional broadcasters and publishers are buying hip upstart Internet companies that could have made a big splash on the Nasdaq. One example is Myspace.com, an online phenomenon that allows anyone to create a personal Web page about themselves. The site has been especially popular with bands that use it to promote themselves to the masses, turning into a sort of MTV for today's teenagers. News Corp. bought Myspace, along with parent Intermix Media, in July 2005.

Another example is IGN Entertainment, which operates the popular IGN.com website that covers video games, movies, music and other things of interest to mostly younger visitors. The company's management filed for an IPO last July, but News Corp. bought the company in September 2005.

Those are just a few examples of how young Internet "companies are much more willing to sell once they reach a certain size" rather than taking a chance going public, Jacob says. And it's not a tough decision to make, he says, pointing out that large companies are paying rich premiums for the Internet properties.

Only the strong survive

Investors' Internet skepticism has been healthy to the degree that only the most iron-clad Internet companies can go public, says Mitch Rubin, portfolio manager of the Baron iOpportunity fund. And that's created some success.

He points to online flower seller Provide Commerce and online jewelry retailer Blue Nile as examples. When Provide went public in December 2003, the company was already profitable. The stock has gained 141% from its first-day closing price. Blue Nile, which has seen its stock gain 32% since going public in May 2004, has also been profitable since 2002.

And it's not impossible for Internet IPOs to get done now. IncrediMail, which offers e-mail stationary to consumers, has gained 15% in two days of trading since its IPO on Tuesday.

Successes like those have encouraged venture capital firms to invest in Internet companies again, and also consider taking them public an option. And that's why Rubin thinks a new crop of Internet stocks will arrive later this year and in 2007. "The promise of the Internet is happening," he says.

Maybe so, but some veteran Internet stock investors didn't have the time or patience to wait around for the second coming of the Internet stock boom. Paul Cook ran one of mutual funds created to invest in the dot-com boom. In 2000, 40 mutual funds had the word "Internet" in their names, Morningstar says. That number has shrunk to 19. Early last year Cook became one of the fund managers quitting the industry when he left to become chief financial officer of an Internet company, called Intelius, which collects and sells personal information.

Despite having to drag his initially reluctant family cross-country from Michigan to Seattle to make the change, he doesn't regret the move. "I'm delighted to be in the Internet industry, rather than just investing in it," he says.

Related Category :

Internet ||

Next ....: Google, Microsoft, and Yahoo Urge Government Intervention Against Censorship

:: Previous Articles
:: CBS.com puts up downloads of 'Survivor'
:: Online Banking: How Safe Is Your Money?
:: Andrew Kantor: CyberSpeak - What 'Web 2.0' means to us

Recent Articles



Home | | Members | Search | Upadtes | RSS | Tags | Site Map | Tags | Conact

© Technoclicks.com - All rights reserved.