Halloween came early for Internet IPOs, with some of the more frightening
balance sheets staying away from Wall Street’s trick or treat festival that
debuted in August, spelling a scary stock market in general. But here’s the
treat part: Internet IPOs are up more than 31% since October 15, with some
showing triple-digit rises.
So, if you’re checking your bag of candy or wondering which IPOs to knock
on the door of, perhaps those still in the pipeline may be worth a taste
test, after you examine them thoroughly, of course. Three of the biggest
things to look for: 1) can the revenue stream for the firm scale and lead,
meet the demand of the market it’s in; 2) can the management team in place
take it to that point; 3) can they control costs and generate earnings
within 2 or 3 years?
The standard-bearers have proven this model, such as Yahoo, Netscape, and
even the heavy-personnel CNET. Amazon hasn’t proven it yet because it’s
going all or nothing to be the retail giant.
For the future, as vertical Internet firms emerge, look for those that
dominate their segments, quarter-on-quarter revenue growth, real alliances,
paths to leverage, and capital access.
Let’s take a look at how those already public have done since October 15
and from the IPO price:
So, while the IPO market for Internet stocks has been dry for the past two
months, with IPODEX heating up perhaps we’ll see some debuts before the
In the IPODEX, note Digital River’s (NASDAQ:DRIV) rise with the tide. It
reported a record
$5.8 million third-quarter revenue vs. $683k 3Q97. Loss reached $3.9
million vs. $922k loss 3Q97.
As it emerges, we think Digital River’s model of creating a
affiliate-driven software selling network may very well be the future of
Providing a turnkey software selling solution looks extremely valuable to
us, as a superior method of selling software vs. the kind that Egghead.com
(NASDAQ:EGGS) does, all packaged and shipped. We think immediate and now,
decentralized e-commerce looks more like a Web way of business than a
one-size fits all Web site.
Web hosting service provider Exodus (NASDAQ:EXDS) posted third-quarter
$14.5 million revenue, up 320% vs. 3Q97 and more than 44% higher than 2Q98.
Exodus provides hosting for such well-known Web services as Lycos
(NASDAQ:LCOS). Exodus grew its customer base by 142 to 642 in third quarter.
We see Exodus’ net loss as a concern at $17.7 million vs. $7.4 million
3Q97, but believe that its’ build out investment requires capital
commitments probably for the next 18 months. We want to see net income
after that and think that outsourcing the hosting equation could be huge.
That’s if the cable companies don’t try and monopolize the Internet if it
becomes popular for customers who want it on high-speed cable wires. Cable
firms may treat Internet access, content, hosting, e-mail, search and
everything related to the open Internet as we know it as “cable programming.”
If that happens then it starts to look a lot like the old interactive TV
game that failed, only with a new name: cable Internet. And firms providing
ANY service or content may be asked to pay the pied piper at TCI, @Home,
Time Warner, Cox, Cablevision, etc. Surest way to stifle global growth of
the medium, centralize the pipes.
Verisign (NASDAQ:VRSN), once the darling of Internet IPOs, lost some favor
(and flavor) with a meager 2.8% climb since October 15, although its up
more than 100% from IPO price in February this year. It posted
third-quarter revenue of $10.5 million, up 174% vs. 3Q97. Net loss was $4.2
million before acquisition-related charges.
CDnow (NASDAQ:CDNW) made a $111 million stock bid for rival N2K
(NASDAQ:NTKI) October 23, that would create the world’s largest Internet
music seller. The move comes none too soon in our opinion. Amazon.com
(NASDAQ:AMZN) generated $14.4 million music vs. CDnow’s $13.9 million and
N2K’s $10.5 million. That’s the reason CDnow and N2K have agreed to merge,
combined sales would be $24 million, well beyond Amazon’s music sales.
As Halloween gives way to the more buying and selling holiday seasons of
December, we’ll be looking for any reaction in e-tail stocks and those that
match buyers and sellers, fulfill the shopping demands of those that want
the ease of use and instant discount buying power of the Internet. More on
that as the bells start to jingle.