When shares of Internet sites network Go2Net jumped 27 percent
Thursday after its Authorize.Net payment processing unit began offering a
service that distributes business Web sites to hundreds of search engines,
I thought the market was over-reacting.
Investors apparently now agree. In early trading Friday, GNET had given back
one-third of Thursday’s considerable gains, even as the Nasdaq was up nearly
3 percent, led by numerous Internet stocks.
Should Thursday’s gains turn out to be a one-day rally, it will be a big
disappointment to investors of Go2Net, one of the undisputed stars in the
Internet stocks galaxy in 1999, but a stock that, before Thursday’s run-up,
was down 59% this year.
The frustration for GNET investors is that the company is still doing what
it did last year, when it was a market darling; namely, continuing its
incredible revenue growth while increasing profitability.
Last month Go2Net reported Q1 earnings that showed revenues of $18.7
million, a 333 percent increase over the year-ago quarter. That makes Go2Net
one of the top revenue-generators among Web content companies.
Net income in Q1 was $8.3 million, or 18 cents per share, compared to $1.1
million, or 3 cents per share, in last year’s first quarter.
There are more impressive numbers. Gross profit as a percentage of revenue
jumped to 83.9% in Q1 from 78.3% in the year-ago quarter, while operating
income increased 860%.
It was the best quarter ever for the company, topping already high Wall
Street expectations. Yet since releasing its earnings report, GNET is down
more than 20 percent.
So does that make the stock a bargain, or a one-year wonder that has
rightfully fallen back to earth?
Neither one. While GNET shares certainly can be had for much cheaper now
than at any time in the past year, the stock’s current valuation of 27x
trailing 12 months’ revenues of $48.1 million is higher than many other
Internet companies, post-correction. (See Wednesday’s StockTracker Daily.)
Still, the company appears to have a bright future thanks to an innovative
business plan that has 1) effectively built and monetized traffic across its
network of branded Web sites through viral growth, rather than relying on
heavy marketing expenditures, and 2) spawned a lucrative mix of consumer and
business services.
Authorize.net’s search engine service is a good example. Called
GoSubmit.Net, the service automatically submits a company’s Web site to more
than 1,500 search engines. Even better, it monitors any changes in each
search engine’s methods for ranking search results, and resubmits the
company sites each month using this new information.
Any Web site operator who has tried to get listed on search engines knows
how difficult and scatter-shot the process is. But it’s critical to
establishing a Web presence and drawing traffic. GoSubmit.Net makes it much
easier, allowing businesses to focus on content and services.
This kind of innovative, valuable service is what has enabled Authorize.net
to attract 70,000 online merchants as customers. And it’s why Go2Net should
continue as one of the premiere Web properties.
