Internet services company Web.com Group (Nasdaq: WWWW ) looks like it could be one of the next big players in the online landscape. The stock has surged more than 80% in the past year, driven by explosive top-line growth. That sounds great, but this stock may actually be one of the worst places to put your money.
The business
Web.com seeks to provide one-stop services for entrepreneurial small businesses and individuals. You can buy a domain name and get hosting, email, SEO, and many other services all in one place. You can even use the company's platform to self-publish your website, or Web.com can design and manage it for you. As you can imagine, there is plenty of demand in this area, as the 102.5% increase in trailing-12-month sales attests to.
But sales growth alone isn't enough to sustain a business. At the end of the day, investors also need to consider the soundness of financial statements, which is precisely where Web.com is lacking. It has enormously high debt, standing at more than three times equity. On top of that, Web.com isn't even making money! It hasn't turned a profit since 2009, when it made just over $1.5 million. Keep in mind the market value of the company is currently creeping toward $800 million.
In addition to the financial weakness of the firm, it operates in a fiercely competitive industry, with fairly low barriers to entry.
Akamai Technologies (Nasdaq: AKAM ) , for instance, provides cloud services, Internet security services, and optimization solutions for commercial websites. It's far bigger than Web.com, has been growing revenues consistently for years, and -- gasp! -- has been consistently making money for years. Last year the net income was over $200 million, which was more than Web.com's total revenue in 2011. Akamai has the whole efficiency thing down.
Rackspace Hosting (NYSE: RAX ) , another big player in the industry, is mainly a cloud-computing firm, specializing in hosting solutions for businesses. Though the focus on cloud computing differentiates it from Web.com, Rackspace offers many of the same services, including hosting, email, and e-commerce platforms. With a debt/equity ratio of only 0.21, 15% returns on equity, and accelerating net income growth, Rackspace has it going on.
EarthLink (Nasdaq: ELNK ) also provides security solutions, cloud hosting, and other business-based services, in addition to offering Internet access to its consumer segment. Although EarthLink actually makes money, it definitely isn't the best option for investors; earnings were down nearly 60% last year. EarthLink is also a very mature business, with fewer opportunities for growth than the companies already mentioned, in part because of EarthLink's focus on the more stagnant telecom services market. Though it's the only one of the four companies paying a dividend -- and a 3% dividend at that -- declining profitability should make investors cautious.
The takeaway
Web.com operates in an emerging technological landscape, one that should be very lucrative for a handful of businesses. But right now, Web.com doesn't seem to be one of them. Until its financials start turning around and it starts showing a sustainable, positive earnings trend, competitors like Akamai and Rackspace look far more attractive.
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