Dueling Fools
Into the CMGI Incubator
Bear Rebuttal
By
Paul Commins (TMF Buster)
Let's get the common ground out of the way. First, I have no quarrel with Rick's vision for the future of the Internet. I don't doubt for a moment that this still-emerging communication medium will continue to change our world in dramatic ways. Just like the automobile, airplanes, and electric power, this world-changing technology is indeed here to stay.
Anybody want to buy stock in automobiles, airplanes, and electric power?
Second, I'm also with Rick when it comes to looking past today's market doom and gloom, the usual macroeconomic noise. Wherever the promise of attractive returns on equity remain solid, today's struggling Internet upstarts should survive hard times and emerge strengthened. If CMGI were a solid business model, this would indeed be a great time to buy its stock.
I'm looking, but I just can't seem to find the solid business model.
You see, Rick, it's not a matter of the Internet "marching back into favor." Those days are gone forever. It wasn't "irrational exuberance" that stoked the boom. It was an entirely rational reaction to two very powerful market forces: 1) the apparent certainty of abundant wealth creation, and 2) a lack of history to guide investors toward the winning business models amid the hoards of pretenders. So, money poured into "the Internet market" and everything went up.
Today, we have what we lacked at the start -- history's concrete examples. Much of what was once unknown is now known. The Internet companies that march back into favor, then, will be those that master what works. The money will pour into these guys and these guys only. And it's not clear to me that CMGI has found anything that works yet.
Now, Rick claims that four of five CMGI operating segments are expected to be cash-flow positive by the end of this year. Here he's finally speaking the language of business, and if he's right, I could end up eating some crow. But, examining CMGI's financial statements, it's not at all clear to me how this will be achieved.
CMGI Total Operating Revenues and Cash Loss
(Dollar values in millions)
Year Ending 7/31 1998 1999 2000
Total Revenues $92.2 $186.4 $898.1
Cash Loss from Ops $69.3 $90.1 $763.7
Cash Loss Margin 75% 48% 85%
After moving in the right direction in 1999, CMGI took a giant step backward this past year, losing $0.85 in cash for every dollar of revenue recorded. And these numbers are through midsummer, the salad days of online advertising. Ever since, Internet ad rates have been punished, punctuating these numbers with an even bigger question mark. Can CMGI -- with its large stake in Net advertising -- really turn this trend around in the next year?
Little optimism leaps from the pages of recent filings by CMGI's public operating companies. Engage grew revenues by a whopping 559% in the year ended July 31, 2000, but alas, increased cash losses from operations by 554% as well. On the plus side, NaviSite has slowed its cash burn rate from 192% of revenues last year to just 60% in the latest fiscal year. Gross margins have also improved. The down side? NaviSite's gross margins are still negative. Ouch.
Perhaps my relentless assault on CMGI financials is shortsighted. Am I taking pot shots while ignoring the big picture -- the long-term future? Well, I'm trying, but absent compelling developments in the numbers, I am left looking to CMGI corporate communications for the upside of the vision. When I found the official CMGI corporate vision statement on its website, though, I didn't come away inspired. I came away shaking my head. Here's a snippet:
"CMGI is committed to the belief that the Internet creates global opportunities for all commercial enterprises; that it has already had a revolutionary impact on the way business is and will be transacted for many years to come as well as on people and their relationships. The Internet continues to expand at an astonishing rate, thanks to more users, more devices and more bandwidths; as it grows, it becomes more complex. CMGI exists to meet the needs of Internet users, both individuals and organizations, and sees itself as a moving force behind shaping its direction and evolution."
And so it goes for another whole paragraph of vague, mind-numbing word play that could be succinctly summed up as "Internet is good; CMGI is Internet." Sorry, folks. Without a more concrete, focused plan, I see this company continuing to do a lot of things in a mediocre way and eventually being marginalized, battleground by battleground, by more focused competitors.
But what about CMGI's venture capital funds. Should we be excited by the prospect of buying into these? I'm not.
This tangled web of investments is significantly harder to track than a simple Internet-focused mutual fund, so why bother trying? Does Wetherell really have the knack for "picking tomorrow's superstars, today," as Rick suggests? Where on earth is the evidence? Does he sell the hot ones and fold the dogs into his operating companies?
And "add up the assets" is a game best left to the pros. If there really were a storehouse of riches bound up in CMGI's investments -- one that isn't reflected in its stock price -- don't you think the hedge fund guys would have found it by now? They've got the huge asset piles, the armies of data crunchers, and the thirst for tenths of a percent in upside over the short term. Don't get dragged into this game. Stick with long-term investments in individual companies where the investor's playing field tilts in your favor.
See if you can find some companies with a comprehensible, focused business plan, with clear competitive advantages. In other words, don't waste your time on CMGI.
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