RB Criterion #2: Sustainable advantage gained through business momentum, patents, visionary leadership, and/or inept competition.
On the one hand, Webvan is further consolidating its own industry via its merger with Homegrocer.com, creating a company whose combined balance sheet shows, as of July 1, 2000, a $579 million cash horde. That money, just sitting in what is basically the company's savings account, is worth well more than most of its smaller competitors' market caps. That represents staying power within an industry shaking out, and I see that as sustainable advantage. Webvan Group is getting bigger while others get smaller.
At the same time, the cash drain on this business is substantial. What did it cost Webvan Group and Homegrocer.com to run their businesses in the first half of this calendar year? Answer: $182 million (that's the negative operating cash flow). That implied run rate of $360 million a year would exhaust the company's cash box in less than two years.
Now we would presume that in fact the merger will reduce redundant operating expenses, and "scale up" the business closer toward the requisite number of customers to break even. So it's not fair to add up their negative cash flows, in the first place, let alone continue to project them into the future. There will be greater efficiencies. That said, Webvan admitted in its most recent conference call that the two companies do not work their distribution centers identically, so that there are some challenges to smooth integration. They estimate $20-$30 million in cost savings next year.
Anyway, the tenuous financial structure of this company does not ultimately cause me to feel that Webvan's advantage over its present competitors can be confidently projected to last the 2-3 years we Rule Breaker investors are looking for. One sees announcements indicating that grocers like Safeway (NYSE: SWY) and Publix are planning on offering these services -- it may well be that no one will have a sustainable advantage anytime soon, here.
RB Criterion #3: Excellent past share appreciation, measured by relative strength of 90 or higher.
Er... no. The relative strength of this stock, grading from 1 to 99 its past year's performance on the public markets, is extremely low... SO low that I will not reveal the actual number, as I consider that indecent and this is a family website. Suffice it to say that our requirement of 90 or higher is way out of reach. Incidentally, by respecting this attribute as part of the overall required mix, you stayed out of Webvan Group (away from the stock, that is) all the way down. Did it look like a Rule Breaker, or smell like a Rule Breaker? The stock never said so; the market has from the get-go been saying "Faker Breaker."
RB Criterion #4: Good management and smart backing.
I'll give a nice checkmark to Webvan for this criterion. The company was founded by Louis Borders (yes, that Borders). The passion and strong Andersen Consulting background of its CEO, George Shaheen (who's also got a lot of skin in this game), is sizable. The board has Tim Koogle from Yahoo!, is adding Jim Barksdale (late of Netscape), has Christos Cotsakos from E*Trade, and features the capital of Benchmark and Sequoia. True, they're probably not all delighted with how things have worked out, and the stock has to represent a little mud on their chins. (Look at this book cover, for one prominent example. Ouch.)
At the same time, no risk, no reward. Most of us, as Rule Breaker investors, respect the risk-taking of enterprising people and organizations, and know that things don't always work out. Anyway, it's a pretty accomplished and well-connected group of people who are working to make Webvan succeed. And Homegrocer brings with it the backing of Amazon.com and Kleiner Perkins (or, as the wag hath recently writ, speaking of what happens to their companies after they IPO, "Decliner Perkins").
RB Criterion #5: The greater the consumer brand, the better.
Big check mark. It's a good simple name and its trucks will be out there, everywhere, if the company can prove profitability (starting with the San Francisco Bay Area). Webvan, in the dream scenario, would become one of the U.S.'s better-known brands. The potential is there.
RB Criterion #6: A significant portion of the financial media has called it overvalued.
Given that some of its competitors are down below a dollar a share, and look to be worthless, perhaps the media could be flaming away at The Van even after an incredible decline. But not likely. The dynamic of high relative strength leading to high shouts of "overvalued" that I typically look for in my Breakers is completely absent, here.
To Conclude....
Webvan Group is not at present a Rule Breaker. Were the company to turn profitable and begin to demonstrate the ability to lead across more product categories than groceries, and if we saw the market recognize that and turn the stock the other way, then maybe Webvan Group could be a Rule Breaker. I'll keep my eyes peeled, and keep rooting for the company because as a consumer I'd really like to see them and their business succeed.
If this company does fail, they may perhaps have been too early.
If this company, or its concept, ultimately overcomes the risks and succeeds, we'll all have lots of time to purchase it on the way up for many long-term returns. Meantime, they can keep doing good by staying focused on the customer, keeping tight reins over the cash, and continuing to bust some of their criminal customers.
Fool on!
David Gardner
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