The honeymoon romance that begins when a firm first hits the Web and makes a splash until it goes public and then has to show the world its balance sheet both good, bad or ugly usually lasts about 24 to 36 months. As the new ‘venture’ investor, Wall Street allows the hyper-Internet time frame to grow the business and extract the two cents worth in two years.
The magic formula for pricing Netscape (NASDAQ:NSCP) in its glory days as the flagship Internet stock was a discounted earnings projection of 50x two year’s out.
Our roundup of the newlywed firms showed an average second quarter loss per share of $0.25. As a group, the Internet stocks shown (culled from ISDEX, the leading stock index for the Net), revealed an $8.25 loss per share for the basket. The snapshot:
ISR’s 2Q Estimates
NOTES: * CNWK = $0.02EPS with gain on sale; +preferred dividend deducted;
#Netscape charges factored; INTU, NSCP have July ending quarters; NETA = $1.87 loss per
share with charges; SDTI = before non-recurring charges; SPYG = pro forma; USWB = -$1.81
loss per share with charges; VOCLF = -$0.25 loss with charges; consensus & ISR estimates used
Of course there’s always footnotes and pro formas. Excite (NASDAQ:XCIT) wrote off its entire $68 million pay to play with Netscape this quarter, rather than having that charge drain future earnings for the next two years. Acquisitions, charges, non-recurring gains all influenced EPS or loss per share.
CNET (NASDAQ:CNWK), for example, posted $0.02 EPS by selling part of an investment in another firm. Without that unusual gain CNWK would have recorded $0.24 loss per share. The funny part is the stock went up while the group went down.
While the losses look great from a fundamental analysis view we would also look at the losses for some as being investments in the future. Buying ad reach and marketing muscle on today’s Web is cheaper than it will be in six months or a year to reach the same percentage of the Web.
We’ve seen this with AOL’s marketing deals. At first the order of magnitude was under $5 million in the un-tested field of selling exclusive audience reach. Now marketing deals are routinely done north of $25 million. Excite sold its finance channel to Intuit for $40 million light years ago and Intuit investors balked. That same channel space may cost $100 million today to sponsor.
Amazon, Barnes & Noble, CDnow, N2K, Egghead, and more have all had to ante up marketing dollars to buy space on Yahoo!, Excite, Lycos, AOL, Infoseek.
As the Internet grows sideways and up we expect firms that deploy capital now to build market share and mindshare at the expense of dressing up their balance sheets in earnings attire too soon. They could be the longer-term winners, but it doesn’t work for all. AOL posted losses for a decade and now it sits on top of the Internet group as prima facie evidence of that rule at play.
Market today to get reach, sell that reach tomorrow to a wide assortment of service and merchandisers.
The ones that can do this will be rewarded. The others will be wishing they never went to the altar of the new information age as Wall Street dumps them quicker than a rock star with no prenuptial agreement.