First Mover Disadvantage
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The rules of Net investing are more art than science. The reason? There are really no objective ways to value companies that are losing lots of money, have limited operating histories and small revenue bases.
You need to focus on subjective factors, such as management, positioning, branding and so on.
One common factor is the famous "first mover advantage" (FMA for short). There are many examples where this has worked wonderfully. Yahoo! (YHOO) had the advantage of being the first portal; VeriSign (VRSN) was the first in digital certificates; RealNetworks (RNWK) was a pioneer in online audio, which the company then leveraged into online video.
The rates of return have been awesome. A ten-thousand investment in each of these companies - since the IPO - would have yielded the following:
2. VeriSign: $123,382.
3. RealNetworks: $135,245.
But don't be fooled. The FMA is no panacea. Truth is, a company may have the FMA in a market that may amount to very little. Or a company may be too early. As the old saying goes: "You can spot the pioneers. They're the ones with arrows in their back."
On paper, the company makes sense. First of all, the grocery market is huge: $449 billion in 1998. Second, grocery shopping is unquestionably boring. But there was a big problem: The grocery industry has slim margins. To make money, a company needs to control distribution costs, which Peapod's model did not. Peapod's plan was to be a reseller, not carrying any inventory.
No surprise, Peapod's stock has been a terrible performer. And this should continue. This week, the company reported its results. In the last quarter, sales posted an anemic increase to $16.5 million from $15.7 million while losses ballooned from $5.1 million to $9.4 million.
Then there is Webvan, which plans to go public today. This company had the advantage of seeing the problems of Peapod and developing a model that controls distribution costs. That is, Webvan is developing its own system, with highly automated warehouses placed strategically across the U.S.
In fact, it is common that once an FMA company heads down the wrong path, it is nearly impossible to reverse course. This is especially the case with Net companies, which burn lots of cash quickly.
Peapod is now changing its model, developing its own warehouse system. But it is crippled by a low stock price, which makes it difficult for the company to aggressively compete against Webvan, which plans to raise more than $375 million. Keep in mind that the market capitalization of Peapod is $262 million.
Thus, at $15 per share, Peapod is no bargain. It could easily go lower and lower.
The lesson from Peapod is that, as an investor, you really need to think about the core of the business model when looking at an FMA company. Does its system involve much labor? Are the margins slim? Do consumers really demand the service? Trying to find answers to these types of questions can save you major investment headaches.
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