A New Beginning, And Beginning of the End

Maybe shareholders of online grocer Peapod should take comfort in the recent ticker performance of video streaming software maker Digital Lava, another company whose stock was downtrodden for most of the past year.

Of course, it would be false comfort, since Peapod (PPOD) has virtually no chance of surviving in the face of continued low margins, huge losses and shrinking cash reserves. Thanks to the departure (announced Thursday) of CEO Bill Malloy due to health reasons, a group of investors rescinded a $120 million investment offer. With only $3 million in cash, Peapod can only search for more investment money or a buyer.

Like Peapod, Digital Lava finished 1999 having missed out on the huge run-ups experienced by dozens of other Internet stocks. PPOD closed last year at 8-5/8, a gain of 26.6 percent that did little to get the stock back to its June 1997 IPO offer price of $16 per share.

Digital Lava (DGV), meanwhile, went public in February 1999, finishing its first day of trading at 6-9/16, or 14 percent below its 7-1/2 offer price. It was the ninth-worst debut among more than 250 Internet offerings last year. DGV wrapped up 1999 at 7, a gain of only 6.7 percent from the first-day close.

While both stocks were treading water in the early going this year, their paths have diverged dramatically in recent weeks. Thursday’s news sent PPOD shares plummeting to 3-1/2 by mid-afternoon, a devastating drop of 55 percent from Wednesday’s closing price of 7-13/16.

In contrast, DGV was trading at 17 per share Thursday afternoon, a gain of 267 percent in March alone.

The reason for Digital Lava’s rapid ascent can be summed up in two words: Cisco Systems (CSCO). The networking giant has taken a liking to Digital Lava’s video-on-demand software and services, and last week offered the company a third contract to produce and deliver more than 200 hours of content for product and sales presentations.

Other large companies are noticing. This week Digital Lava signed a contract to produce virtual trade show content for Novell. Others should follow.

Unfortunately for Peapod shareholders, there is no Cisco in the company’s future. Just skeptical investors watching a struggling sector go through a shakeout.

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