HealthStream’s Sickly Ticker Performance

While investors in the vast majority of Internet companies have had little
to cheer about this year, at least most of them have some pleasant memories
to cling to during these dark times.

Not so for shareholders of HealthStream ,
whose ticker fortunes have gone from bad to worse since the company went
public on April 11, offering 5 million shares at $9 each.

In nearly four months on the Nasdaq, HSTM has not finished one day of
trading above that offer price. And after releasing Q2 results following
Monday’s market close, shares may forever remain underwater.

HSTM hit a new low in Tuesday’s trading, falling to $2.03 by noon, a 26%
drop from Monday’s close of $2.75 and 77% below the offer price.

Fueling Tuesday’s plunge was a quarterly report showing growing net losses.
The Q2 loss of $5.6 million was more than five times the net loss in the
year-ago quarter, while HSTM’s six-month net loss of $9.1 million is more
than six times the $1.5 million loss in the first half of 1999.

Now, compared to the $45 million in net losses for Akamai Technologies , a
company we looked at Monday, HealthStream’s river of red runs shallow. But as an
e-learning software and services vendor targeting a niche market, the
healthcare industry, HealthStream doesn’t have the upside potential of a
company like Akamai, which sells its content delivery services to all

Further, while a company like Akamai is addressing a universal need, better
and faster content delivery, HealthStream itself acknowledges in its S-1
filing that “we are competing in a new market (online training and
continuing education in the healthcare industry) which may not develop or in
which we may fail to gain market acceptance.”

While that kind of risk warning may have been treated as boilerplate by
investors just a year ago, these days it is taken seriously. Especially, in
HealthStream’s case, because the company is locked into spending $30 million
over the next five years as part of an agreement with Healtheon/WebMD .

HSTM is paying to be the exclusive provider of education and training for
healthcare workers and organizations on Web sites owned and operated by
Healtheon/WebMD. But HealthStream must pay the $30 million “regardless of
the level of demand for online training and continuing education by
subscribers” on the Healtheon/WebMD site.

Then there’s HealthStream’s acquisition strategy, a key part of its growth
plans. Early this year alone, HealthStream purchased four companies for a
total of $11.8 million. Given HSTM’s depressed stock price and resultant
lower market capitalization (about $40 million), it may have difficulty
raising more money for future acquisitions.

And with cash reserves of about $50 million through Q2, that means
HealthStream must either slow its burn rate to avoid going broke within a
year, or stop buying companies, thus harming revenue growth.

Ah, the harsh realities of the Internet stock market, circa 2000.

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