Last year, the market punished dot-com stocks with obstructed paths to profitability. This year, even being cash-flow positive might not be enough. It's not the earnings, but the quality of the earnings that will eventually matter. Survive versus thrive might seem like a small divide right now, but the gap will grow. Learn the difference today before everyone else does tomorrow.
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Somewhere along the way, the rules of dot-com investing have changed. The pursuit of eyeballs has become the pursuit of profits. Our own John Del Vecchio and Paul Larson have already eulogized and moved on this month. Fear and opportunity are not strangers. Our comprehensive Industry Focus 2001 hasn't backed away from the possibilities. The latest Internet Report is aptly entitled Internet Survivors. This new year promises to be a gold mine within a minefield. Pack a metal detector. Reality vs. perception No one. And, while that should be frightening to everyone, it's just more of a confirmation that the market itself is as superficial as it is reactionary. Don't worry. That's actually an exhilarating notion that promises to reward those who are able to stay a step ahead of the market mindthink. So, let's attempt to dissect reality from perception. The media has made it clear that Wall Street is fed up with money-losing dot-coms. What isn't being said is that the market has also tired of many of the money-making ones too. Uberportal Yahoo! (Nasdaq: YHOO) doesn't speak of EBITDA or being cash-flow positive (the vernacular of choice for the nearly profitable) -- the company has been clearly in the black for years. If the market put its money where its mouth is, Yahoo! would be a high-flying role model. Instead, the stock has shed 85% of its value over the past 10 months. Don't believe the hype. The move toward cash-flow-positive aspirations is not driven by visions of shareholder enrichment. It's happening solely for corporate survival. With the financing channels no longer there to subsidize losses -- or even to leverage gains in many cases -- the quest for positive cash flow might be more than just a refueling station. Realistically, it might be the only feasible destination. That means that shareholders survive. It certainly does not imply that they will thrive in the process. Stocking up at the smorgasbord It over-delivered on the top line. It over-promised on the bottom line. Consumer perception of the online shopping experience as a quickly searchable bargain index has kept gross margins thin. The expense of marketing e-tail, from outright advertising to viral affiliate programs, has not come cheap. The costs of fulfillment have been hard to pass on to the end user, who is still swayed by free or discounted shipping options and demands prompt execution that is no easy feat to outsource successfully. But, if one is to reason that Amazon.com stumbled because it failed to combine fat margins and profitability in a single shipment, doesn't that take us back to Yahoo!, which has delivered on both fronts? Not really. Beyond a matter of metered exuberance, Internet growth is no longer an open-ended variable with unlimited upside. Especially for the established players, we now have a clearer picture of steady usage growth as well as the medium's strengths and limitations. That comfort level has given investors the ability to hearken back to earnings-based valuation gauges that were off-limits in the past. Yahoo! profits rose 48% last year, but are projected to climb by just 19% this year, assuming that the slower growth for 2001 is sandbagged by a sluggish ad market and does not free Yahoo! from the inescapability of more predictable growth in the future. Of course, reliable PEG and YPEG ratios will not suddenly rule the trading day. That's never been the case in the near term. However, the leash just got shorter. And no, that doesn't imply that Yahoo! is a dog. It's the volatility that is now on the tighter leash. Less downside. Less upside. A tale of two cities So, is it 2000 all over again? Hardly. There is more to the break-even game than getting there. That hobbyist in Topeka who registered IthinkIWantToStartAnOnlineBusiness.com this morning is just $30 away from a profit right now. In CMGI's case, the lesson is easy. As soon as the tide shifted on sustainability benchmarks last year, companies dusted off their basic algebra books. The cash on hand divided by the burn rate became the sands of time and, wouldn't you know it, most companies announced that their hourglass management would be just fine. But it was too good to be true. The moral of the story? You can't turn a business model on a dime. For Travelocity, the excitement goes beyond "when" and more into the field of "why." Why is it ahead of schedule? The conversion rate of site strollers into customers, the so-called "lookers-to-bookers" rate, is growing. That's momentum. That's good business. That's what tomorrow is all about. Good businesses. Good valuations. It sounds a lot like yesterday. Wouldn't you know it? To stay one step ahead of the market all you had to do was take one step back. Related Links:
The oasis of perpetual liquidity via secondary offerings has dried up. This has forced once-promising yet deficit-ridden Internet companies to shave pages off business models and to skip steps on the path to profitability. No one is lamenting the corners that are being cut. No one is questioning why these moves weren't made from the start. No one is wondering what kind of beauty or monstrosity lies beneath these on-the-fly makeovers.
You can't judge a buffet by the width of its spread. That's the problem with revenues-based valuations, which prize quantity over quality. When Amazon.com (Nasdaq: AMZN) went public in 1997, landing in the Rule Breaker Portfolio a few months later, the company's goal was to hit $1 billion in annual sales by the turn of the century. The century turned. The company will report about $2.8 billion in revenues for fiscal 2000.
It was the best of dot-times. It was the worst of dot-times. Last week Travelocity.com (Nasdaq: TVLY) reported that it might turn a profit as early as the next quarter -- a half year earlier than anticipated. The stock soared. Meanwhile, the incubator township of CMGI (Nasdaq: CMGI) backed off its recent turnaround targets. The stock got slammed.
A Dot-Bomb Postmortem
Assessing Internet Stocks in 2001
Internet Report -- Internet Survivors
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