Good read on web design sector:
worldlyinvestor.com
finance.yahoo.com
I agree there is some value plays here but will let the mkt tell me when to buy in....
Web Consultants Go Down a Load
By Mitch Ratcliffe
Columnist
09/01/2000 8:25 AM
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Four months after the market for Internet stocks corrected, the companies aiming to profit on the construction of Web sites and services are feeling the pinch.
This shouldn't have come as a surprise, since the drying up of dot-com capital was bound to lead to falling Web-design revenue, but the fact apparently caught investors unaware when Viant Corp. (VIAN: Nasdaq) said revenue for the third quarter ending Sept. 29 will fall 12% to 15% below the latest second quarter's $38.5 million. The company saw its shares fall $4 in after-hours trading to 9 7/8 after the CEO revealed the pending revenue shortfall.
Now's the time to do some bottom-fishing to pick up bargain-priced Web-design stocks. This contraction of design revenues will hone the best of these companies for better performance and, importantly, force them to adjust their pricing and services to a more normal marketplace. Let's face it, the dot-com boom was a time of exorbitant expenditures, but that doesn't mean that companies no longer need Web-design services.
Drop in Design Value
Viant, along with other Web-consulting firms have not fared well since the April correction -- most are off their highs by between 30% and 85%.
Scient Corp. (SCNT: Nasdaq), at 25 3/4 in after-hours trading on Thursday, has fallen from 133 3/4. Razorfish Inc. (RAZF: Nasdaq) fell from around 56 15/16 to 12 1/8. MarchFirst Inc. (MRCH: Nasdaq), assembled from the combination of the former US Web/CKS and ad firm Whittman-Hart, was trading at 18 3/4 after-hours on Thursday, down from a high of 81 1/8. Sapient (SAPE: Nasdaq), the reigning colossus of this market with a $6.2 billion market cap, is off its highs by 30% at 49.
Viant President and CEO Bob Gett explained the forecast by saying that dot-com client spending has fallen recently and that, with the threat from start-ups diminished, mainstream companies are spending less to keep up: "With the perceived threat from dot-com companies reduced, many Global 2000 companies have slowed down their e-business initiative…." No kidding!
Not Revving Enough
At the same time that revenue is falling, the Web-design and development firms are facing escalating costs, because they are typically located in the most expensive regions and are contending to hire the most expensive employees. Not-terribly-talented engineers command over $100,000 a year in San Francisco, San Jose, New York and London.
Now, if you take a look at the average revenue per employee for this group, only one stands out as producing enough revenue on average to deliver a profit: Viant, at $275,533, according to Multex Market Guide. MarchFirst, still in the throes of post-merger changes, produces a startlingly low $96,913 per employee. The rest, Scient, Razorfish and Sapient, average $184,240 per employee.
Considering that advertising -- the old economy industry that most closely resembles the Web-design business in organization and process -- produces an industry average $192,074 per employee, these Internet companies actually compare quite well.
Nevertheless, I can't help thinking that the Web-design industry has worked on inflated fees and needs to do a bit of economizing.
In fact, I own a large share of a privately held Web-design firm -- I could be speaking from experience or this could be sour grapes -- that is profitable on a lower-than-average fee structure.
High-Maintenance Relationships
Too many companies I am familiar with feel that they have paid far too much for Web-development projects. Most of the executives I talk to believe that they have not received code and designs that were worth the cost, and many of these projects have been immediately replaced.
The Web firms generally look for long-term and high-priced consultative relationships when the projects they take on could be done in short order.
Falling revenue just don't seem that surprising now that many old economy companies recognize that the e-commerce upstarts aren't going to sweep them from the face of the Earth this Christmas season.
Marching to its Own Beat
Viant, at 9 7/8, looks attractive. Though analysts have not had time to react to the revenue warning at this writing, seven rate Viant a "strong buy" and 10 a "buy."
Its high revenue-per-employee figure and miniscule price-to-book and price-to-sales ratios, Viant is one of the more attractive Web-design stocks. I wouldn't be a buyer this week, because investors are not done punishing this company.
But there's a lurking giant that is tremendously undervalued: MarchFirst. The company hauled in more than $600 million in revenue in the first half of the year -- almost three times as much as Sapient, which is valued at three times MarchFirst's capitalization. There's quite a discrepancy, to put it mildly.
Add to that the book value per share of MarchFirst is $47.85, compared with $6.11 for Sapient, and the evidence suggests that MarchFirst is the most attractive of any of the Web-design stocks. At about 19, marchFIRST is a buy. Since the whole sector will likely be punished after Viant's admission that revenue is falling, you should wait to let the dust settle to gain additional upside. MarchFirst lost 1 1/4 during the day Thursday and another one point in after-hours trading.
The slide will likely continue Friday. Once it's over, take a serious look at marchFIRST as the Web design component of a tech portfolio. |
