Tuesday, June 29, 1999
Price (6/28/99): $11 3/8
HOW DID IT FIND TROUBLE?
Vroom! Vroom! Back in late March, Internet automobile site Autoweb.com was one of the hottest IPOs to screech onto the scene. After being offered at $14 per share, the company's stock was bid all the way up to $40 by the end of the first day of trading. Twenty-one million shares were exchanged between speculators that day, meaning the float had turned over more than three times in just one trading session. Autoweb.com had driven itself to Nasdaq, only to be greeted by an army of day traders.
On the second day of trading, the shares hit turbo again and were bid as high as $50, more than triple what those buying at the IPO paid for the shares a scant 48 hours earlier. Another 7.8 million shares traded on day two, meaning the company's entire float of outstanding shares had yet again changed hands.
As one might have guessed since this column is entitled the "Daily Trouble," the shares of Autoweb.com have been in a skid ever since those first two heady days of trading. Beyond blaming the recent malaise in most Internet stocks and the inherent volatility in IPOs, it's difficult to determine why the shares have dipped back below their IPO price.
First on the list of suspects is the fact that Autoweb.com's arch-rival, Autobytel.com (Nasdaq: ABTL), had also successfully pulled off an IPO soon after Autoweb.com's debut. While Autoweb.com had a head start in the public markets, Autobytel.com came public a mere three days later and raised approximately the same amount of cash. Autoweb.com stocked up on ammunition (cash) to wage the war for market share against Autobytel.com, but Autobytel.com was now well-armed, too.
Suspect number two may be the public realization that General Motors (NYSE: GM) was going to try and get in on the automotive e-commerce action by opening and actively promoting its own site, www.gmbuypower.com. In other words, Autoweb.com now finds itself competing against not just Autobytel.com, but also against some of its suppliers and partners.
Whatever the reason for the skid, the action of the shares over the past three months can be summed up in one word -- Crash!
Based in Santa Clara, California, Autoweb.com is one of the leading consumer automotive Internet sites. Through the site, drivers can research and conduct business relating to just about any aspect of owning, buying, or selling a car.
With an extensive network of dealers and individual sellers using the site, Autoweb.com is one of the most active marketplaces on the Web. The company recently announced that its Internet site sees over $26 million worth of transactions a day, or over $10 billion a year. Most of the company's revenue is generated by dealer-referral and ad-placement fees for cars, but the company also generates funds through advertising and various other ancillary activities, such as financing and insurance.
After operating as a private company for little under four years, Autoweb.com went public on March 23 of this year at a price of $14 per share.
12-month sales: $16.6 million
12-month income: ($12.1 million)
12-month EPS: ($1.60)
Profit Margin: N/A
Market Cap: $279.7 million
Cash: $65.3 million
Current Assets: $78.5 million
Current Liabilities: $8.1 million
Long-term Debt: $0.6 million
HOW COULD YOU HAVE SEEN IT COMING?
Autoweb.com's stock illustrates some of the dangers of buying into a company soon after its IPO. While some IPOs give shareholders outstanding returns over the following months, not all IPOs are instant successes.
Autoweb.com may very well go on to dominate the automotive e-commerce space, but the company only has red ink to show for its efforts thus far. Autoweb.com was valued at $1.2 billion two days into its public life, quite a hefty amount for a company with only $13 million in 1998 sales. This means the market had largely priced the company like it had already won the race, when the true race was only just beginning.
Speaking of that race, it was widely known that company nemesis Autobytel.com was also planning to go public. When Autobytel.com completed its own IPO, it essentially doubled the market's supply of automotive e-commerce companies. On Main Street and Wall Street alike, the rules of supply and demand apply.
WHERE TO FROM HERE?
Autoweb.com, as well as Autobytel.com, may prove to be tasty acquisition candidates to the consolidators in the used-car industry, such as AutoNation (NYSE: AN) or CarMax (NYSE: KMX). No juicy rumors here, just an observation that Autoweb.com is essentially doing something similar online to what AutoNation and other "new age" car dealers are doing in the corporeal world.
Like the heated battles between Ford (NYSE: F) and General Motors of old, Autoweb.com and Autobytel.com are neck-and-neck in a race to dominate the online car-shopping market. But unlike the real car industry, whoever eventually wins the race will probably end up with nearly the entire pie. The automotive e-commerce space is more like the online auction market, where the most active site is going to continue to attract buyers and sellers alike. The more vehicles to choose from, the more buyers will show up. The more buyers, the more dealers will utilize the service. It's a case where the strong get stronger and the weak will have a difficult time surviving.
Autoweb.com and Autobytel.com are, for all practical purposes, tied in this race right now. While Autoweb.com says it is driving $26 million in sales a day, Autobytel.com says it is doing $24 million. Autoweb.com has higher growth, but Autobytel.com has a more established brand name. One area where the two rivals differ is in their operating model. Autobytel.com charges subscription fees to its dealers, while Autoweb.com charges dealers a "per lead" fee that will give Autoweb.com more of a benefit from the growth in online car buying.
One concern for investors is the traditional channels of distribution. Autoweb.com is not really creating any more car sales than before the Internet came around. Rather, it's just stealing the business from elsewhere. The classifieds are a major profit center for newspapers across the country, and companies like Tribune (NYSE: TRB) are not likely to give up this business without a fight.
Of even greater concern are Detroit's efforts to perhaps circumvent middlemen like Autoweb.com altogether and sell directly to consumers using the Internet. Even though Autoweb.com is a highly innovative middleman, it is still a middleman. General Motors is making the most waves in this area, and others are sure to follow. Investors in Autoweb.com and Autobytel.com should keep a close eye on these efforts.
In any case, the automobile business is a monster business (approximately $1 trillion in annual sales), and Autoweb.com is making a valiant attempt at grabbing a slice of this huge pie. And, now that the shares have sold off significantly, the company is today in the discount bin relative to its Internet peers. With $65 million in cash (roughly $2.66 per share), negligible debt, and significant topline growth, those comfortable with the risky and uncertain nature of upstart e-commerce firms should at least kick Autoweb.com's tires for themselves.
--Paul Larson ([email protected])
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