Hungry Internet Investors

Like a pack of starving dogs being tossed a side of beef, Internet
investors pounced all over the IPO of online medical supplies middleman
Neoforma.com (NEOF)
on Monday, with shares offered at $13 each opening at 40 7/8 before
shooting up to 56 1/4 by early afternoon.

That Neoforma.com bills itself as a B2B play certainly added a wildly
popular flavor to the offering, but what really drove the opening-day
feeding frenzy was acute hunger: A ravenous Internet IPO market hadn’t
been fed a new ticker in more than a month. The last Net stock debut
was on Dec. 21, when Streamedia Communications (SMILU)
went public.

However, given Neoforma.com’s short operating history, unproven business
model and scant revenues, it’s possible that investors who got a taste
of NEOF at first-day prices may soon be feeling a little queasy, for it
will be a real challenge for the company’s stock to maintain its initial
altitude. (In fact, shares began dropping Monday afternoon as the Nasdaq
declined.)

Neoforma.com allows purchasers of medical supplies to buy products
online. The company sells items from a number of suppliers and
distributors, ranging from expensive medical testing equipment to
surgical gloves and cotton swabs. It also has auctions and provides
interactive content to healthcare planners and designers.

But Neoforma.com had only $464,000 in revenue in the nine months ended
Sept. 30, 1999, and no prior revenue. Most revenue to date comes from
transaction fees from sellers using Neoforma.com’s AuctionLive service.

The company says it best in the “risk factor” section of its S-1 filing,
in which it volunteers, “Because we have only recently introduced our
services, it is difficult to evaluate our business and our future
prospects.”

We can, though, evaluate Neoforma.com’s losses. Through Sept. 30, the
company ran up a deficit of $30.6 million. Further, Neoforma.com says it
expects to continue to “incur substantial operating losses for the
foreseeable future.”

Neoforma.com is just one of many Web firms competing in the online
medical supplies and equipment market. It is not the leader, and the
market itself is in the early stages, thus making it premature call any
winners. The company admits as much, and pins its hopes and building
brand awareness where there is now little.

Maybe it will. Still, the company offers a vague and untested recipe for
success.