RealTime IT News

Gloomy Internet Study Still Attracting Attention

Is time--or more importantly, money--running out for Internet firms?

Pegasus Research International got widespread attention Monday for its prediction that at least 51 publicly-traded Internet companies--including some big names like drkoop.com and CDnow -- will burn through their cash supplies within the next 12 months.

The dry-up dates from Pegasus were based on the assumption that the 207 dot-coms studied would continue booking revenues and expenses at the same rate as in the last quarter of 1999. That assumption, and other aspects of the study's burn-rate methodology, quickly prompted several Internet firms to issue press releases Monday refuting the study.

VerticalNet (VERT) and others pointed out that Pegasus failed to take into account the full picture of their financial condition, including recent outside investments.

Among the companies atop the list of Pegasus' so-called "Burn Victims" were, in descending order of their likelihood of running out of cash: Pilot Network Services (PILT), CDnow (CDNW), Secure Computing (SCUR), Peapod (PPOD), VerticalNet, Marketwatch.com (MKTW), drkoop.com (KOOP), InfoNautics (INFO), and MedScape (MSCP).

The study, which was published in the latest issue of Barrons, a magazine known among Internet investors for its bearish views on the Net sector, revealed that 74 percent of firms have negative cash flows.

That Internet companies are losing money is hardly news. Indeed, Pegasus said it simply reviewed publicly available financial documents to compile its list. Nonetheless, the report has some investors and Internet startups wondering anew whether a change in the investment climate is on the way. Will burn rate become the metric for screening Internet stocks?

"All we're doing is looking at one factor of the equation in Internet investing," said Greg Kyle, founder of Pegasus Research on Tuesday. He said other elements that investors must gauge include: what is the company doing to capture market share? Are its margins improving? What is its profitability relative to others in its market?

"What we wanted to get across is that they are opportunities and risks out there, and you have to look at both sides," said Kyle.

But many investors simply unloaded shares upon learning Monday that their stocks were high on the burn-rate list, with CDnow falling almost 17 percent. Secure Computing slid 14 percent on the day. And Drkoop.com was off nearly 16 percent. In mid-day trading Tuesday, all continued to trade lower, though not nearly so steeply.

According to Barrons, burn rate only creates problems when a company's share price comes "unglued" or falls precipitously. When that happens, a firm's ability to raise fresh fundst