CMGI Results Revive Investor Confidence

One day you’re an Internet superstar, the next day your earnings report is
relegated to the “in other news” section of trade and business publications.

That’s what can happen when your stock falls nearly 70 percent since the
beginning of the year. And that’s what happened to Internet incubator CMGI , whose “beat the
street” quarterly report released after Tuesday’s trading showed torrid
revenue growth and a much smaller than expected net loss.

Though the
news
caused barely a ripple in the media, investors took notice, driving
up shares of CMGI nearly 8 percent in early trading Wednesday.

While hardly a run-up, CMGI’s post-earnings gain can be seen as a vote of
confidence for a company that has inspired little of that commodity for most
of this year.

After finishing 1999 as arguably the hottest Internet stock of all – gaining
940 percent last year, with the vast majority of that coming in the fourth
quarter – CMGI began falling to earth not long after the Times Square ball
on New Year’s Eve.

Interrupted only by a brief early-March rally, CMGI’s descent took share
prices from 138 7/16 on Dec. 31 to as low as 44 1/8 on May 26. (CMGI was
trading Wednesday afternoon at 58 3/16, after closing on Tuesday at 56 5/8.)

With profitability nowhere in sight, CMGI has had a difficult time getting
off the canvas this spring, as the post-meltdown market began shying away
from ‘Net companies that continue to lose money. But investors clearly were
impressed by the company’s Q3 revenue of $226 million, and rightly so. It’s
an increase of 417 percent from the year-ago period (ended April 30) and 47
percent from the second quarter. It also puts CMGI on the list of top 10
Internet revenue generators.

The red ink is flowing faster than ever, with CMGI posting a Q3 net loss of
$428 million, or $1.53 per share, versus a net loss of $186 million, or 74
cents per share, in last year’s third quarter. However, Wall Street
estimates called for a net loss of $1.83 per share.

Are investors rewarding CMGI for beating expectations? Sure, in part. But
they also are discounting the company’s large losses because of its business
model. Unlike an online provider of products or services, CMGI doesn’t make
its money by selling things. It generates revenue by investing in other
Internet companies; more than 70 at last count, including online ad services
provider Engage Technologies and search portal AltaVista.

Many of these investments don’t pay off right away. For example, CMGI
initially expected to cash in on an AltaVista IPO earlier this year, but the
disintegrating market for tech public offerings has pushed back the launch
date to the fall (and that’s no certainty, either).

This business model makes it hard to compared CMGI and similar companies
such as Internet Capital Group to Internet players in other sectors. Some readers objected to
a recent
column
in which I argued that ICGE was overvalued relative to most other
Internet companies, based on a market cap to revenue ratio.

And it is, but their point is well-taken; you can’t easily reduce financial
results for a investment and holding company to a simple formula for
comparison with firms that have radically different businesses.

On the other hand, it’s hard to point to proof of concept when there is no
tangible evidence, such as net income or a strong trend toward
profitability. No one knows yet whether ICGE’s investments in a number of
B2B e-commerce start-ups will pay off. The track record just isn’t there.
Nor can anyone guarantee that CMGI is headed toward a pro

fit in the near
future, or ever.

But based on its latest quarterly results, CMGI is much closer to providing
that proof.

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