FOOL ON THE HILL
An Investment Opinion
Is the Internet Revolution Over? Bill Mann (TMF Otter)
November 10, 1999
As much as people scream about the staggering valuations given the ".com's," it may be worthwhile to look at the Internet companies that have not reached the heights of commercial success. After all, it is a common misconception that one can take any idea, slap a .com onto it, and sit back and collect the moolah.
Well, it's just not so. For every eBay (Nasdaq: EBAY) or Amazon.com (Nasdaq: AMZN) that seems to defy gravity and every law of valuation, there are others that have seen their market caps clipped at the knees, their business models raked over, their losses (both paper and real) piled high. As the wave of initial public offerings continues, we will likely see the flameouts of more and more Internet companies.
Upon being told of the death of his wife, MacBeth laments that she should have survived for many years. He ends his soliloquy by providing one of the most jarring descriptions of the fleeting nature of life:
Life's but a walking shadow, a poor player
That struts and frets his hour upon the stage
And then is heard no more: it is a tale
Told by an idiot, full of sound and fury,
MacBeth Act 5, Scene 5
What is the connection? Well, there are several. First, the Internet revolution is, in some ways, just another in a long line of innovations that change how people interact. But since almost no one among us was alive during the advent of the automobile or the airplane or even the telephone, we do not remember those revolutions that have created some of the largest companies on the face of the earth: GM (NYSE: GM), Boeing (NYSE: BA), AT&T (NYSE: T), DaimlerChrysler (NYSE: DCX). These companies were the first movers and the long-term beneficiaries of these individual revolutions. What about the computer revolution? Does a world absent the products of IBM (NYSE: IBM) or Microsoft (Nasdaq: MSFT) really seem possible now? And yet, those revolutions are now old enough that they have become, if you will, the system.
One hundred years ago it was an all-day trip to go from San Francisco to Oakland, or from Tampa to St. Petersburg. These gaps hardly seem real anymore in an atmosphere where one can bop from Washington, D.C. to London for a meeting and then back again in the course of 24 hours. Is this revolutionary? Not anymore. It just is. It is a path for commerce that had not existed before this generation, for all practical matters, just as television made indelible changes the generation previous, and radio the one before that.
And now we have the Internet. Full of sound and fury, signifying nothing. The Internet is a new path for commerce and communication, but it does not defy gravity, and it is not magic. Neither are the companies that occupy it. They still operate on the same capital models as every other company, and in the end, if they don't make the dollars, they don't stay in business.
I'd also point out that the time is quickly going to be upon us when the term "Internet Company" may seem a little ridiculous. For example, as L.L. Bean continues to transition from a mail order to an Internet presence, will it be a .com? Or is Gateway (NYSE: GTW), with its online product customization site, making the transition into becoming an Internet company? But what about the Gateway Country stores? Now what is it?
The Internet is a medium. An exceedingly groovy one, one upon which The Motley Fool is highly dependent. It is a means for companies to derive revenues. Some are really good at it, such as Yahoo! (Nasdaq: YHOO), Dell (Nasdaq: DELL), or America Online (NYSE: AOL). Others hold promise of being really good at it, such as eBay and Amazon. Still others, well, they're no more high-flying than their struggling non-cyber counterparts.
The roadside is already littered with some former Internet stars. Look at the stock charts for Autoweb.com, or iVillage, or TheGlobe.com. I'm not speaking about their business models, because I do not understand how these companies derive their revenues. But it is pretty clear that investors have greatly discounted these companies' potential to ever turning a profit.
($ in millions) Autoweb.com (Nasdaq: AWEB) Market Cap: $241 Net Sales for 6 mos. through 6/99: $21.7 Net Loss for 6 mos. through 6/99: $9.7 6 Month Sales Growth vs. '98: 157% Net Profit Margin (ttm): -63% IVillage.com (Nasdaq: IVIL) Market Cap: $696 Net Sales for 6 mos. through 6/99: $25.3 Net Loss for 6 mos. through 6/99: $63.1 6 Month Sales Growth vs. '98: 276% Net Profit Margin (ttm): -235% TheGlobe.com (Nasdaq: TGLO) Market Cap: $288 Net Sales for 6 mos. through 6/99: $12.2 Net Loss for 6 mos. through 6/99: $33.4 6 Month Sales Growth vs. '98: 455% Net Profit Margin (ttm): -254%These companies are bleeding money through operations. It is probably not fair to compare them to developed stage companies, since the capital costs in the development stage of nearly any company are monumental. In fact, one need only to look at the asset costs that the development stage telecommunications are incurring to see that the amount of money that the three companies detailed above are burning through are not high on an absolute or percentage basis. The most glaring example may be Teligent (Nasdaq: TGNT), with first and second quarter 1999 revenues of $5.5 million with a loss of $231 million. But development stage telecommunications companies such as Teligent are largely given much more leeway than their Internet brethren.
Why? Because the basis for stock valuation is the discounted aggregate of all future earnings. Not just revenues, profits. Teligent, even with its significant current ledger of losses, has been assigned a much greater prospect for future profitability than iVillage, theGlobe.com, Autoweb.com, or a hundred other Internet companies. Although the insiders for these companies may have struck gold through the IPOs, the majority of all their investors to date have suffered mightily. The superlative statements many market pundits made after the spectacular openings each stock made have been long forgotten. They were the vanity of the living, full of sound and fury, and signifying�
Well, we don't know what they signify just yet. Certainly they serve as a reminder that the greatest cyberspace idea ever conceived is meaningless unless its proponent company finds a way to make it relevant in the real world. Car quotes over the Internet -- truly a great idea. I'd love to be able to shop for a car without having to suffer a dealership experience. But will I, Joe Six-Pack, change how I purchase my next set of wheels? Eh, I doubt it.