Delusions Die Hard

It is one of only a half-dozen Internet companies to have lost 90 percent or more of its value through May this year.

Seven weeks ago, it announced it was losing its biggest customer, which accounted for 30 percent of the company’s revenues, and that it would let go 10 percent of its workforce.

And on Sunday, online insurance services provider InsWeb said

layoffs would soar to 40 percent over the next two quarters and that revenues would fall well below previous estimates.

In a lame – oops, I meant “game” – effort to inject some hope into an increasingly dire situation, InsWeb officials also said they expect the company to become profitable by 2003.

That InsWeb officials would be so bold as to issue a profitability forecast amidst a corporate meltdown strikes me as an example of Internet “old-think” – the mentality that existed before March, in which ‘Net companies and their financial backers were able to successfully downplay, or even ignore, gaping potholes in their business plans that threatened to derail their journey from here (huge past and current losses) to there (profitability).

I didn’t think that kind of stuff would fly these days, yet shares of INSW soared more than 25 percent in early trading Monday before investors began sobering up and drove gains down below 10 percent by noon. (They shot back up to nearly 20 percent by mid-afternoon.)

Of course, the market typically greets layoffs with great relish, as they imply severe belt-tightening and fiscal responsibility. But usually it’s companies far larger than InsWeb, which has a market capitalization of around $100 million, that can endure the pain of layoffs and retrenchment.

Further, for InsWeb to become profitable within the next two years, it will have to do a lot more than cut costs: It must replace the loss of its top customer, State Farm Insurance, which accounted for 30 percent of revenue. As it stands now, Q2 revenues are forecast to be $5 million, which is 42 percent below Q1 sales of $8.6 million. Net loss for Q1 was $13.1 million, up from $11 million in the previous quarter and $6 million in the year-ago quarter.

I’m sure InsWeb is trying its best to turn things around, but the stark fact is that the company is in desperation mode, despite idiotic comments from one analyst for INSW’s lead underwriter who says he is “encouraged at the seriousness of the reassessment.” (He must have been doing cartwheels when State Farm pulled out.)

The truth is this: InsWeb officials have absolutely no idea when, or if, the company will ever be profitable. They just don’t know. So forecasts such as those made Sunday are literally meaningless, and should be treated as such.

Internet investors would do themselves a great favor by remembering the hard lessons of this spring: Optimism is great, but delusion is dangerous. Based on INSW’s performance on Monday, it appears some investors have short memories.

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