Internet: Attractive E-mail Marketing Stocks
Staff Writer: Judith Graham (1/14/00)
After marketers struck gold last year with the advent of “opt-in” e-mail messaging, e-mail marketing start-ups rushed in to tap the public markets.
While it may sound like “spam” with a fancier name, opt-in e-mail messaging (or marketing) targets voluntary recipients – that is, e-mail users who have expressly agreed to receive marketing pitches in their inboxes. And thanks to the scores of users who've checked “yes, send me e-mail,” marketers have witnessed exceptional response rates.
According to Forrester Research, e-mail marketing is web advertising's most effective tool.
Compared to banner ads, which yield average click-through rates of 0.65%, opt-in e-mail's average 18% response rate is quite staggering. And while e-mail marketing is just a $26 million industry today, Forrester expects it to breach the $1 billion mark by 2002.
As a result, a flurry of e-mail marketing start-ups, including NetCreations (NASDAQ:NTCR #Subject-31682) and Digital Impact (NASDAQ:DIGI #Subject-31884), have hopped on the bandwagon in hopes of finding success too.
Now, as the big Internet advertising players look to expand their positions in the e-mail marketing space, some of those start-ups are beginning to see their efforts pay off. Highlighted last month by CMGI's (NASDAQ:CMGI) acquisition of permission-based e-mail marketer Yesmail.com (NASDAQ:YESM #Subject-30817) , the Net advertisers next move is to solidify their positions in the e-mail marketing space.
In addition to Yesmail, which boasts a database of more than four million e-mail subscribers, CMGI controls a majority stake in Engage Technologies (NASDAQ:ENGA #Subject-28149) , which delivers marketing messages based on individual surfing behavior. And with its acquisition of Flycast (NASDAQ:FCST #Subject-25811) in November, CMGI also gained InterStep, which provides targeted e-mail management and delivery services.
DoubleClick (NASDAQ:DCLK) , the current market leader, is preparing to launch its own e-mail marketing platform, DART mail, during the first half of this year. Abacus Direct, which DoubleClick acquired last June, provides a good complement to DART mail via its database that tracks consumer catalog buying behavior.
24/7 Media (NASDAQ:TFSM #Subject-22043) also operates an in-house e-mail messaging service -- 24/7 mail -- which provides targeted e-mail delivery services. Last year, it acquired ConsumerNet, proprietor of one of the industry's largest opt-in e-mail databases, and e-mail marketer Sift Inc., to expand its e-mail offerings.
But as the big guns rev up their e-mail marketing capabilities, can the second-tier players survive?
According to analyst Tara Long of C.E. Unterberg Towbin, the knee-jerk reaction is to assume these players as takeover targets, especially given CMGI's recent acquisition of Yesmail.com. But since e-mail marketing is still so new, there is room for multiple players to compete.
In addition, the big net advertising companies' e-mail marketing strategies and technologies are still nascent, says analyst Dana Serman at Lazard Freres & Co.
“[Smaller players] can compete because have they have the lead,” Serman says. “They may have less in way of resources, but it takes many years in terms of programming time for the big players to set up [their own e-mail marketing services]. It's a massive undertaking.”
And as demand for e-mail marketing services continues to ramp up, there is plenty of work to go around.
According to Forrester Research, the massive server farms, hefty bandwidth and IT staff required to handle the quantity of outgoing messages, incoming responses and undeliverable bounce-backs will be more than most companies can justify on an ongoing basis. As a result, firms will have to outsource the job to e-mail marketing companies.
So which e-mail marketers will be the greatest beneficiaries?
Net Creations, Digital Impact, and MyPoints.com (NASDAQ:MYPT #Subject-27573) , are the most frequently listed favorites among analysts.
Permission-based e-mail marketer NetCreations, which Long refers to as the “pioneer of opt-in e-mail” (it was founded in 1995), provides a service similar to Yesmail.com's.
With a database of nearly five million names #reply-12578485, NetCreations is already several steps ahead of the pack. According to Forrester Research, of 50 companies polled, 4% said they used NetCreations to manage their outbound e-mail campaigns. And with revenue of $19.7 million, it's the second largest player in its space behind MyPoints.com. Its shares currently trade around $36.
Long says NetCreations' added value is in its double opt-in process. “Everyone that signs up gets e-mail from NetCreations to verify that they will receive marketing e-mails, and must e-mail a response to confirm,” she explains. “The advantage is that marketers using those lists will have more success – those people [that have signed up] want to hear the message.”
Also on the outbound delivery side, Digital Impact helps businesses craft e-mail messages and resell products to their existing customer base. Using data about customers' purchase history and preferences, Digital Impact enables its clients to produce highly targeted campaigns.
Long says Digital Impact offers a compelling investment since it focuses on customer retention, and e-mail has proven such a powerful retention tool. After running up as high as $65 following its November IPO, Digital Impact now trades for about $40. Last year, the company had $7.5 million in revenue.
Unlike NetCreations and Digital Impact, MyPoints.com, which we recommended last month, gathers consumer data using a rewards program.
MyPoints pays people points for taking surveys, reading e-mail and surfing the web. The points can then be redeemed at affiliated merchants. But in order for users to receive the points, they must complete a detailed questionnaire that is used to build MyPoints' database. MyPoints then uses this data to help its clients create targeted e-mail marketing campaigns.
So far, the strategy is paying off. While shares now trade at $60, well off their 52-week high of $97.69, MyPoints managed to rake in $7 million in sales last quarter, well above the $2.9 million expected.
Other companies to keep an eye on include:
MessageMedia (NASDAQ:MESG) , which helps companies deliver high volumes of e-mail, ranging from newsletters to e-commerce transactions, and manages inbound mail.
Exactis.com (NASDAQ:XACT #Subject-31842) , like MessageMedia, focuses on high-volume e-mail delivery, and provides services such as subscription management, and list administration.
Mustang.com (NASDAQ:MSTG #Subject-22647) , which makes software to help companies design, develop, market and support inbound e-mail routing, responding, and organizing.
Cybergold (NASDAQ:CGLD #Subject-30288) , similar to MyPoints.com, provides direct marketing and cash-based incentive solutions.
While there is still plenty of room for these companies to grow, Long says it's likely that we'll see some consolidation a year or two down the road. Serman says he wouldn't be surprised to see half a dozen reasonably substantial acquisitions in the next 18 months.
“DoubleClick and 24/7 are very likely to buy some of these players,” he says. “But [right now] they won't be frozen out of the market by these bigger companies. The market is explosive enough for all players.”
Serman says the data networking industry, which Cisco Systems (NASDAQ:CSCO #reply-12233363) has managed to consolidate through various acquisitions over the past few years, provides a good gauge of what will happen in the e-mail marketing space.
Bottom Line:
The likely consolidators? In addition to DoubleClick, CMGI and 24/7 Media, Serman suggests e-commerce infrastructure players BroadVision (NASDAQ:BVSN #Subject-13470) and E.piphany (NASDAQ:EPNY #Subject-29433) could also express some interest. Long says investors should also look for portals, ISPs, and offline media companies to get involved.
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