FOOL ON THE HILL
The Best-Kept Dot-Com Secret

Left for dead, the remaining dot-com stocks are creeping back into favor. A lot of factors are at play here. With fewer companies out there, and the upstart pipeline running bone dry, there is plenty of elbow room. When all it takes is baby steps to crawl out of the gutter, forgotten Internet stocks are coming back, relatively speaking.

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By Rick Aristotle Munarriz (TMF Edible)
April 9, 2002

The next time you really want to make an impression at a cocktail party, tell folks how great your dot-com portfolio is doing. Eyes will roll. They will laugh at you like you're Rip Van Winkle tapping a snooze bar.

"Good one!"

"Hey, McFly, Dr. Emmett Brown called. He wants his DeLorean back."

"Who's your designated driver? Looks like someone's been partying like it's 1999."

But, you counter, you're serious. You have the math to prove it. You are armed with the truth behind one of the most seemingly incredulous statements in the investing space: Internet stocks are back, baby.

Bad timing and a domain name chomping at the bit to start rolling downhill battered Snowball.com (Nasdaq: SNOW). The entertainment network of sites went public in March 2000, just as the Nasdaq exchange was peaking. It was an avalanche from that icy summit. By the end of the year, the stock would have gone from a euphoric opening day high of $20 a share down to a piddly eighth nine months later. Melting? Hardly. The stock has been a 63-bagger off that all-time low. Thanks to the popularity of its Webby Award-winning IGN.com gaming site, the company has been able to ride the tide of anxious video game diehards looking to stay current with all three next-generation gaming consoles.

With eight million unique visitors a month, IGN.com has been able to grow beyond the ad-based model that vanquished many a content site. With 45,000 paid subscribers and new ventures like online stores and classified listings, the site is a snowshoe in the door to the lucrative video game market, which became a $9.4 billion industry last year.

The stock is as profitable as Frosty is real, but cash-flow-positive Internet companies are slowly becoming the norm rather than the exception. No, really. As Snowball tries to roll towards profitability, other upstarts are already there.

Shopping portal 800America.com (Nasdaq: ACCO) has been consistently profitable for three years running. The company posted earnings of $0.52 a share last year on "Microsoft (Nasdaq: MSFT) in its prime" net margins of 36%. A year ago, the stock was fetching less than what the company wound up earning in 2001. What? You've never heard of the company? Let me guess, it's that ".com" tail in the moniker that's throwing you off, isn't it?

Like jumbo shrimp, online profits seem like an oxymoron. Like just about everybody else, you began to lose sight of the Web as a cost-efficient provider of convenience and accessibility, only to see it as little more than a place where falling click-through rates and the drying up of venture capital coated the entire sector in elephant graveyard hues.

You were wrong.

eUniverse (Nasdaq: EUNI), along with its collection of entertainment websites, has been in the black for the last three quarters and growing its positive cash flow for the last five. FTD.com (Nasdaq: EFTD) has been so efficient at delivering bottom-line results as it has been in the delivery of floral arrangements that its parent company is taking it back.

Even as most sectors wrote off 2001 as a recessionary dud, online travel was hot thanks to the fiscal thumping performance of its Travelocity (Nasdaq: TVLY) and Expedia (Nasdaq: EXPE) bellwethers.

Stock prices in the dot-com realm have quietly inched higher, whispering affirmation for what investors dare not speak. Amazon.com (Nasdaq: AMZN) has more than doubled off October's lows. While its first bona fide profit back in December was chock full of asterisks and footnotes, the leading online retailer has indicated that it will post positive operating cash flow this year -- possibly even favorable free cash flow.

Basically, the Internet joke isn't funny anymore. After the dot-com hype fizzled, folks shook their heads at Autobytel (Nasdaq: ABTL) and its master plan to serve as the online matchmaker for car dealers and wheel-hungry cybersurfers. Who's laughing now? You've got to love the company's Auto-Cupid ways. Through its four websites, the company accounts for an impressive 4% slice of all new car sales in the country. And, naturally, the company is now cash-flow positive.

In the spirit of full disclosure, I'll admit that I keep close tabs as to how MarketWatch.com (Nasdaq: MKTW) and TheStreet.com (Nasdaq: TSCM) are faring. As a financial journalist with more than just a vested interest in watching Fool.com thrive, it's just human nature to follow one's publicly traded peers. The last six months have been encouraging as TheStreet's share price has nearly tripled while MarketWatch has seen its stock more than quadruple. MarketWatch is now cash-flow positive. TheStreet isn't quite there yet, but operating results are improving.

Sure, most of these catapults started out as leaps off the sub-buck trampoline. I'm not suggesting that we should all go speculative with pocket change; that's what the department-store mechanical pony is for. But when I argue that the surviving Internet-anchored companies never had it this good, I don't want to be hit up for a urine sample.

It's an ironic business reality. No one is anxious to subsidize new online concepts and that simply makes the established players that much more tantalizing. With fewer companies dot-coming the landscape, site operators don't need to be looking over their shoulders to see which bankrolled newbie is out to sell crisp dollar bills for ninety-cent prices. With the funding spigot locked on stun, it's all about teaching the new-economy dogs some old-economy tricks.

It's working.

While Drugstore.com (Nasdaq: DSCM) is still a year away from turning the corner, are there really that many more corner drugstore.coms out there right now? The competition is thinning out as financial Darwinism takes its course. Even hobbyists are being snuffed out as free webhosts are either now charging for their services or wallpapering the free sites with enough ads to make the surfing experience unbearable. The options are no longer infinite. The potential competition is no longer unlimited. The key to success is now a simple, natural mandate: breathe.  

The lessons are being learned, even if the classrooms are now nearly empty. When companies like iVillage (Nasdaq: IVIL) and SportsLine.com (Nasdaq: SPLN) were launched, they figured that losing money for the sake of growing an audience was cool. Wall Street said so. Venture capitalists nodded in agreement as they handed over the blank checks. Now that times have changed, both companies have shaved costs to the point where they are taking in more money from operations than they are putting out.

It's like The Poseidon Adventure, in which the select few who survive do so because they realize that the only way out is to work their way up to the bottom of the ship. Get it? The bottom line is now the passageway to higher ground. The fact that the companies left standing realize this, and have been quietly climbing their way out in the dark, may prove to be the masterful misdirection play of our generation.

The burst bubble is playing dead. The beating heart tells a different story. Dot-gone? Hardly. Here's some line art for your cocktail napkin:

                     Low     Date    Return 

Snowball.com         0.13  12/21/00  6,208% 
Amazon.com           5.51   10/1/01    153%
Autobytel            0.70   9/26/01    457% 
TheStreet.com        0.92   10/9/01    182% 
Marketwatch.com      1.06   9/27/01    323% 
SportsLine.com       0.73   9/17/01    373% 
iVillage             0.57   9/17/01    295% 
Drugstore.com        0.46   9/20/01    476% 
800America.com       0.37    4/5/01    678% 
eUniverse            1.06    4/4/01    303%

Rick Aristotle Munarriz never got around to registering Edible.com. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.