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Internet companies cannot be valued in the same manner as off-line companies. Traditional metrics such as P/E ratios are of little use when most companies post large losses. The industry is instead focused on building brands and obtaining market share. For the near future, quarterly earnings will remain forsaken for long term growth and business viability.
One of the factors driving the current Net stock prices and valuations into orbit is a simple supply versus demand equation, as large numbers of investors chase a small amount of available shares. Take the for instance, the volatile, but extremely well-performing shares of Red Hat Inc. (RHAT) and FreeMarkets Inc. (FMKT). The stocks have risen 1,535 and 400 percent from their respective $14 and $48 offering prices. Red Hat has 68.8 million shares outstanding, but only 6 million, or 8.7 percent are floating. FreeMarkets has 34 million shares outstanding, but only 3.6 million shares, or 10.6 percent are floating. Such small floats have guaranteed Internet stocks huge upswings as demand for shares in Net companies easily out-strips supply. Small floats also give a lot of power to the hyperactive day traders and often spell headaches for short-sellers who can easily be "squeezed" with so few shares on the table.
But float is only part of the story. The real issue is the unprecedented growth of the Internet industry and its companies. Actions speak louder than words, and numbers are a result of actions, so we'll let them do the talking. The following is a listing of third quarter results from leading Internet companies. With fourth quarter numbers just around the corner, the following results should establish a baseline for investor expectations.
internet.com (INTM)(the publisher of this site) reported Q3:99 revenues of $4.1 million versus $973,000 in revenues for Q3:98, an increase of 323%. Revenues for the nine months ended September 30, 1999 were $8.6 million as compared to nine-month revenues for 1998 of $2.8 million, an increase of 210%.
CBS Marketwatch.com (MKTW) reported that revenues rose 287% in Q3:99. Revenues climbed to $7 million from $1.8 million in last year's third quarter. MarketWatch posted a pro forma net loss of $0.50 per share. First Call estimates called for a loss of $0.64 per share.