Knowledge Is King: IPODEX Shows Group Highs & Lows
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In an episode of 'Candid Camera' in the 1970s they did a skit where everyone in the elevator turned backwards and those that got in the elevator did the same, assuming the group knew what it was doing. Herd mentality.
Fast forward to today and there's a group doing much the same thing, following the crowd, buying Internet IPOs like lottery tickets, going for the quick trade. That explains the huge runs in something like EarthWeb (NASDAQ:EWBX) and to lesser degree theglobe.com (NASDAQ:TGLO). Check our table full of stats:
|INTERNET.COM'S||Ticker||Share price||Share price||% change||% change||IPO||Share||% change||Share||% change|
(c) 1998 Mecklermedia - Internet.com
The only problem with this "anti-investing" (because investing is too strong a word here, it implies knowledge of the company), is it often leaves "retail" investors riding a mechanical bull without an off switch. In that case the only way off is to get thrown. Hard.
Internet companies have a variety of business models: some ad based; others sales based; others direct marketing based; consumer-centric; business-to-business; and hybrids of all of these and a few more besides.
That requires homework on the part of anyone that wants to know whether an Internet IPO is worth looking at or not. The H word. It means evaluating the company's business model, knowing its market, understanding competition, knowing who the management is and what they've done in the past, the risks involved.
Without that understanding then herd mentality rules.
And then the mainstream media picks up a few cow patties such as KTEL or ZAP and suddenly the entire Internet stock sector is branded suspect. Meanwhile, back at the ranch, we prefer to let the numbers tell the story. That's the role of Internet.com's IPODEX, to sort the winners, losers and the movement in-between, because Internet IPOs in 1998 show very different results depending on--surprise--what the company's business model is. Let's take a look:
The group is off 25 percent from all-time highs yet up 170 percent from all-time lows. Those in IPODEX with a e-commerce, e-tail or business-to-business bent such as Inktomi (NASDAQ:INKT), eBay (NASDAQ:EBAY), Broadcom (NASDAQ:BRCM), Exodus (NASDAQ:EXDS) and even Digital River (NASDAQ:DRIV) have done well vs. IPO price and vs. the all-time lows for each.
As you can see, these five stocks represent very diverse approaches to e-commerce, e-tail or business-to-business.
Only eBay is a branded play, the rest provide solutions to others.
As far as EarthWeb, whose shares were up 236 percent from IPO price November 11, we believe it may have a long way to go to address the 15 million IT professionals it wants to serve, despite its Web site touting the notion that it "serves" them already. (see ISR Archives for November 17 for our report on EarthWeb).
Meanwhile, theglobe.com wants to be a leading content/community hub. Traffic-wise (users), however, it's not in Relevant Knowledge's top 25 Web properties yet but shows strong user growth of more than 100,000 per month.
A well-designed site, theglobe.com relies on advertising for primary revenue. We target a possible revenue for it for 1999 also at $7 million, healthy growth vs. 1998's expected $3 million. Take it a step further and discover that TGLO market cap to our estimated revenue for the company for next year shows an implied revenue multiple of 73x, an extremely-aggressive (frothy) multiple for a company of this size in our opinion.
theglobe.com may beat the forecast but we think that relies on e-commerce, not its strong point so far, which could mean enormous untapped potential. Overall theglobe.com site looks and feels user-friendly--not a given on the Internet where bad design can make or break any site.
The reinvigorated Internet IPO market has two deals waiting on deck ready to go public: Xoom.com, a community site that derives a majority (69 percent) of its nine-month to September $5.1 million revenue from direct sales and marketing to its members, who it counts as email sign ups.
Relevant Knowledge for the month of October reports Xoom to be the number 13 Web site in the world in number of users and traffic. Xoom set a target IPO share price of $10 with 3 million shares offered through Bear Stearns.
Web content aggregator and syndicator Infospace also waits in the wings. It aggregates content for various outlets -- more than 90 affiliates covering more than 900 Web sites. The affiliates include AOL, Netscape, Microsoft, Lycos, MetaCrawler, Playboy, Dow Jones (The Wall Street Journal Interactive Edition), ABC LocalNet and CBS's affiliated TV stations. It also has plans to support Internet devices such as PDAs, set-top boxes (cable Internet), cell phones and such.
Infospace posted $5.4 million revenue for the nine months ending September, all of that from advertising with plans to sell 4 million shares through Hambrecht & Quist.
So the next time someone turns to you and says "smile, it's an Internet IPO" reply back: "yes, thanks. It's one of the several Internet stocks I've researched and know all about." Some of which may meet your investment criteria and others which may not. That's the nature of investing and not following the crowd either way.