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Market share is key to survival
Investors refocus as Internet stocks fall from grace
Sonita Horvitch
Financial Post
The sharp drop in Internet stocks is providing an opportunity for investors to buy companies that have a leading-edge product or service and the capacity to expand market share at better valuations, says David Wong, special situations analyst at Canaccord Capital Corp. in Vancouver.
"North American Internet stocks are down some 40% to 50% from their 52-week highs," he says. Investors' tolerance toward losses at Internet companies had been growing a little thin of late, especially with the recent number of Internet initial public offerings flooding the market and providing a wider choice. These new stocks have been modelling themselves after their U.S. peers. These companies have a "lot of potential but no earnings."
Mr. Wong makes a case for focusing on revenue growth when it comes to emerging Internet companies. It must be remembered that the reason companies are chasing after revenue growth at the expense of earnings "is to capture market share."
Many Internet companies are committed to spending heavily on research and development, as well as sales and marketing.
Given this reality, revenue growth is probably "the most meaningful measure of an Internet company's success."
He considers a number of criteria in selecting Internet stocks. The size of the company's target market is critical to its survival, he says. Then, the company must have the potential to become a leader in its field. Its management must be able to execute its strategy quickly and efficiently and have a timetable that projects not only stronger sales, but profitability. "It is important to be able to determine just how these companies are going to make profits from their business."
Internet stocks that meet his criteria are:
- SCS Solars Computing Systems Inc. (SCS/VSE), which had a recent close of 91¢ and trades in a 52-week range of $1.80 to 7¢. The Vancouver-based company develops software for online information and reservations for leisure travel products. Its Solarnet Travel System allows, for instance, a bulk seller of airline tickets and a tour operator with travel packages to provide detailed product information for travel agents on the Internet.
SCS recently signed a four-year contract with Orbit Network of Novato, Calif. Orbit provides proprietary connections to the Internet and major airline reservation systems. SCS recently signed a five-year contract with Peninsular & Orient Steam Navigation, a major multinational conglomerate with a travel division that includes a cruise line. The company has about 30 other contracts in the works, most of which are in North America.
Mr. Wong estimates revenue of $1-million for the fiscal year ending November, 1999, and $13.5-million for fiscal 2000. His 12-month target price is $2. 25 on a fully diluted basis.
- Microforum Inc. (MCF/TSE) $5.55 ($12-42¢). Toronto-based Microforum specializes in e-commerce, integrated marketing and database services. "It is on the leading edge of e-commerce development," says Mr. Wong.
It recently joined forces with National Bank of Canada to create an e-commerce platform for financial services to provide online approval for credit, insurance and leasing transactions. This joint venture, in which Microforum has 49% and National Bank 51%, will generate transaction-based revenue, "which is the essence of e-commerce."
The venture will provide Microforum with a continuous stream of revenue and a competitive advantage. It is one of the first e-commerce specialists to announce this type of service.
He forecasts revenue of $43-million for its fiscal year ending February, 2000, compared with a reported $29.1-million in fiscal 1999. His 12-month target on the stock is $11 on a fully diluted basis.
- Envoy Communications Group Inc. (ECG/TSE) $8.20 ($8.70-$3.30). The Toronto-based firm provides advertising and communication services and technology solutions for clients seeking a marketing package.
"It is a recognized leader in e-marketing and is one of the largest purchasers of online advertising in Canada," says Mr. Wong. With its business mix, the company is not dependent on any one industry or client. It is growing internally as well as through acquisitions. His revenue forecast is for $179-million for the fiscal year to September, 1999, and $233-million for fiscal 2000. His 12-month target on the stock is $15.30 on a fully diluted basis.
Mr. Wong has a "sell" recommendation on Reko International Group Inc. (REK/TSE) $5.70 ($6.50-$3.90), which designs and makes precision plastic injection moulds. "The stock has had a good run and surpassed my $5.90 target."
Canaccord Capital Corp. may hold positions in the securities mentioned. |
