That was the market's reaction today, as the online insurance lead-generator saw its stock open 6% lower despite nailing its second consecutive quarter in the black.
Expectations are higher, now that InsWeb is one of the hottest stocks of 2007. Before this morning's slide, shares had soared 144% this year. You don't fly that far from the ground without risking the tug of gravity if you disappoint.
Second-quarter revenues inched 8% higher over the past year, but InsWeb's $8.1 million showing is sequentially flat with its report three months ago. Diluted earnings per share of $0.04 are also less than half of what the company posted in this year's first-quarter report.
It's not as bad as it seems, though. Sequential earnings would actually be higher than the first quarter if you backed out a $308,000 hit in severance costs this past quarter. Retail investors are either glossing over that factoid, or genuinely disappointed that InsWeb isn't displaying explosive sequential improvement. With a lack of major analyst coverage, most investors have to come to their own conclusions in gauging market expectations. That's not necessarily a bad thing.
The long and winding road to profitability
InsWeb is still in a far better place now than in recent years. At times, the stock traded for less than the cash on its debt-free balance sheet. Losses were mounting, pitching lucrative insurance products was a hard sell in cyberspace, and the greenbacks were drying up with every passing quarter.
As a middleman, InsWeb was stuck playing the same game as way too many other insurance lead-generators. The company had to pay up for potential leads through online ad campaigns, then hope to recoup its costs (and then some) in commissions.
The new InsWeb is pursuing the same approach -- but doing so more shrewdly. A hefty 81% of its revenue comes from promoting auto insurance products. Commissions are substantially lower there, but it's the one insurance-industry niche that works well in cyberspace. We're not talking about fancy variable annuities, health coverage plans, or whole life insurance policies, which are more effectively pitched in person.
Going for bunt singles instead of swinging for the exotic-policy fences is paying off. Direct marketing costs as a percentage of revenue have shrunk from 69% to 57% over the past year. InsWeb is in a better place right now than Insure.com
Lead 'em and weep
The stock market is loaded with lead-generators, but only a few seem to be succeeding. Financial rate-publisher Bankrate
Those three companies are doing just fine, all growing and profitable. I'll get to the secret of their success in a moment, but let's go over a few of the laggards. HouseValues.com
The line between winners and losers here isn't necessarily about profitability. InsWeb is now squarely profitable, believes it can sustain that black ink, and is pursuing cost-effective marketing practices. That's great, but once again -- what else has InsWeb got? Lead generators that rely on paid-search arbitrage are really just killing time, waiting for the competition to topple their flimsy barriers to entry.
Investors need to ask lead-generating companies two questions:
- What are your advantages over the competition?
- Are you generating natural, type-in traffic?
The first question will drum up typical responses. Companies will all brag about their relationships, mailing lists, and market-share gains. The second question is the killer. At the end of the day, if a company has to outspend its rivals with contextual marketing campaigns to outproduce them, it's not pursuing a winning strategy.
Bankrate and The Knot are market leaders in their field because they have syndicated content doing the legwork for them. Pull up an interest rate comparison table anywhere on the Web, and there's a good chance that Bankrate.com is the source. The Knot has had branded television shows and print publications, but even something as simple as its online bridal registry business makes it a no-brainer solution for the next bride-to-be.
Travelzoo's moat isn't as sturdy, but the company pioneered the sponsored travel-deals space with its weekly Top 20 emails, now reaching an audience of more than 11 million willing recipients.
I'm hoping that InsWeb grows into that kind of company. But I'm guessing that the company's profitability will only smoke out more competition, making it harder to bid profitably for auto insurance leads in the future.
The fickle retail investors cashing out today might not be simply overlooking the one-time severance hit. Maybe they also see the future, and fear that InsWeb's current strategy will only work for so long.
In that case, here's hoping that InsWeb's working on ways to syndicate content on the cheap. That's the best path to a winning record in this tricky Internet niche.
Bankrate and The Knot are active recommendations in the Motley Fool Rule Breakers newsletter service for high-octane growth stock investing. If you want to learn more, take advantage of the service's free 30-day trial. HouseValues is a former Hidden Gems selection.
Longtime Fool contributor Rick Munarriz still buys his insurance the old-fashioned way. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool's disclosure policy plays the odds.