November 30, 1998

Hope Springs Internet

by Nico Detourn (TMF Nico)

The global stock market sell-off of mid- to late-summer led many professional pundits and individual investors to expect a long dry absence of the Internet company initial public offerings (IPOs) that punctuated the first half of the year. One after another, previously filed IPOs were withdrawn, and anticipated SEC filings never materialized. "Unfavorable market conditions" was the frequently cited explanation for why would-be hot hands suddenly got cold feet. And perhaps it was just as well. Who, after all, would want to take a chance on a speculative "highflyer" when the economy as a whole was limping backwards towards its pre-industrial destiny?

In this mood, many market participants came close to resigning themselves to having missed the glory days of the Internet stocks. So in late September, when online auction house and "trading community" eBay (Nasdaq: EBAY) closed its first day as a public company 163% above its initial offering price of $18 a share, "hope sprang Internet." It would be several weeks, though, before an Internet company again offered virgin shares to the public. And when EarthWeb (Nasdaq: EWBX), which operates a network of web sites for IT professionals, made its debut Nov. 11, followed two days later by online community theglobe.com (Nasdaq: TGLO), the pent-up demand for Internet shares -- for the next Yahoo (Nasdaq: YHOO), or Amazon (Nasdaq: AMZN), or AOL (NYSE: AOL), or, dare we think it... Microsoft (Nasdaq: MSFT) -- was enough to produce the first- and third-best, first-day performances in IPO history.

Of course, the idea that someone would think EarthWeb or theglobe.com were seriously comparable to those four companies is, frankly, hard to swallow. On the other hand, buyers of those shares had to be thinking something. Weren't they?

Theglobe.com's offering, in particular, appeared to attract investors who were new to the stock market. Jumping in feet first, many found out the hard way how the market can treat those who don't understand its basic workings -- regardless of the soundness of the companies whose shares were being bought. Even if valuation is in the eye of the shareholder, the mechanics of buying and selling stock, or how an IPO works, are not especially subjective things. These investor's tales of lessons-learned can be found in our message boards, where their willingness to share their experiences -- their rapid "coming of age" in the virtual stock exchange -- stands as great and at times moving testimony to the power and value of online communities. I must say, though, that as someone who believes in that power, and in the long-term potentials of this medium, their experiences also stand as examples of the excess that at times makes it difficult to respond to those who would brand as a "tulip" every Internet stock trading above some cookie-cutter valuation. Or who label as a cautionary case-in-point every Internet stock wallowing in the tank below its initial offering price. But as they say, that's what makes a market. And, hopefully, a vital and cooperative online community.

Initial public offerings -- past, recent, withdrawn, and yet-to-be rescheduled -- are a fixture of the marketplace. A company can reach a stage in its evolution when going public presents itself as the next vine to swing from. Where and how a company's IPO threshold is defined will be different in each case. For now, it suffices to say that the economics -- the psychology and politics, too -- of IPOs are complex, whether it is an Internet company or a "real" one. The Motley Fool Evening News ran a piece earlier this year, "IPO Market Heats Up," that might be of some interest in this connection.

What I find particularly interesting about many of the Internet IPOs and IPO candidates is how the road they've taken to the public markets runs counter to the accelerating consolidation trend we've seen in the recent period. Thinking about this consolidation trend highlights the lack of substance, or at least meaningful differentiation, of so many of these companies.

The online medium has the ability to support massively scaled operations. That is one of its most distinct characteristics. This being so, it seems that companies like CDnow (Nasdaq: CDNW) and N2K (Nasdaq: NTKI) should have seen the light, made their peace, and taken their vows over a year ago, thus avoiding the lost time and resources spent fighting each other while a more scale-savvy competitor, who need not be named, casually staked a claim to their market. In a similar way, their basic lack of substance suggests that theglobe.com and EarthWeb each belong as component parts of more developed and resourceful online services. That might not be as much fun as record-setting IPOs. Or as immediately lucrative, for some. But it does seem to be the best long-term fate open to these tickers.

The online community developer GeoCities (Nasdaq: GCTY) has been a high-profile "celebrity" Web presence for some time. That alone can lend substance, or its appearance, to a company. Its August IPO was eagerly anticipated. But was it necessary? The stock has climbed back to levels attained in the days immediately following its public debut, which was more than double the initial target price. Looking at the bigger picture, though, I have to wonder if it is also GeoCities' fate to yield to the dynamics of scale, and the logic of consolidation, a logic which the emerging AOL-Netscape story reminds us is something to which even giants -- former and would-be -- must sometimes surrender.

The recent IPO roster is filled with companies that overlap each other in a relative niche, or compete with more established companies: DoubleClick (Nasdaq: DCLK), 24/7 Media (Nasdaq: TFSM), NetGravity (Nasdaq: NETG), Broadcast.com (Nasdaq: BCST), Beyond.com (Nasdaq: BYND), Cyberian Outpost (Nasdaq: COOL), and others. Let's also consider situations like NetGrocer's withdrawn IPO in the context of Peapod's (Nasdaq: PPOD) long wait in the checkout aisle. Other examples of this sort can be found across the industry, from ISPs... to category-specific producers and aggregators of content... to the specialty "solutions" providers.

Are all these companies worthy of their own ticker symbols? More importantly, which of these ticker symbols are worthy of our confidence and hard earned dollars? Or does hope always spring Internet?

Related Links:
-- Internet Stocks message board
-- Breakfast With the Fool -- AOL, Netscape Finalize Deal 11/24/98
-- AOL's Overnight Landscaping 11/23/98
-- Daily Double -- eBay Inc. 11/9/98
-- Internet Interviews -- 11/9/98