BOUT a "cheap Internet stock":
redherring.com
Fish or Cut Bait: Hunting for cheap Internet stocks
By Paul R. La Monica
Redherring.com, October 02, 2000
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I kind of miss the height of Internet stock tulip mania. Terms like viral marketing, monetizing
eyeballs, and (my personal favorite) vortals, or vertically integrated portals -- those don't get
tossed around too much these days. Sigh! I'm getting all verklempt just thinking about these
buzzwords.
It was only a year ago when one Internet stock after another went through the roof. The
investment rationale was that since the Net was revolutionizing the economy, old-school gauges
of financial performance like earnings seemed passé. Of course, since the spring investors have
suddenly started caring more about profits and less about long-term promise. As a result, Net
stocks are now considered leprous in nature, branded with a heinous scarlet "L" -- for losses.
Well this week I've decided to focus on Internet stocks that are actually bargains. That's right:
Internet stock bargains. They are out there. The spring shakedown caused many companies that
are already profitable -- or that will be in the next few quarters -- to fall to the point where
they are now cheap by conventional metrics. Granted, I'm not calling for a return to the
valuations some companies were being afforded back in February and March. But there's a middle
ground between the Dom Pérignon multiples of earlier this year and the Thunderbird-like prices
that some quality Internet stocks trade at today.
MAD ABOUT ABOUT.COM
About.com (Nasdaq: BOUT), the search engine that uses human guides to help find information
for users, is one such company I find compelling. About.com, which went public last year as
Miningco.com and subsequently rid itself of that spelunker-esque moniker, has seen its stock
price fall precipitously along with other online content stocks because it relies primarily on
advertising as a source of revenue.
About.com had traded as high as $105 back in March, hit a nadir of $22.50 in May, and now
trades at about $37.50. So, where does it go from here? I sat down with About.com's chief
financial officer, Todd Sloan, at Red Herring's Venture Market East conference in Cambridge,
Massachusetts, on Tuesday to talk about his company and the current state of Internet stocks.
Mr. Sloan says that despite the fact that investors are down on businesses that depend on
advertising, he sees no need to change the company's business model. "Someone who isn't a fan
of ad-supported business models probably isn't investing in my company now," he says.
About.com has several sources of revenue beyond banner advertising, such as sponsorship of
email newsletters and auctions for preferred placement on About.com's sites. Nonetheless, these
are still just different types of ad revenue.
He admits that it has been a tougher environment the past few months, but maintains that what
is happening now with Internet content companies is no different than the trends affecting
traditional media companies, such as publishers and radio station owners. "All ad-supported
mediums go through supply-and-demand issues and pricing issues," Mr. Sloan says.
The dot-com shakeout has so far not appeared to affect About.com. Second-quarter revenues
increased 24 percent from the first quarter as losses narrowed significantly. The true test, of
course, is how About.com will fare over the next few quarters. Mr. Sloan says that back in July
the company told Wall Street it would be profitable by the first quarter of 2001. "Nothing's
changed," he says.
Analysts are predicting that About.com will earn $1.05 a share next year, so at its current price,
the stock sports a multiple of just 36 times 2001 estimates. Meanwhile, the long-term estimated
growth rate is 75 percent. So About.com is incredibly cheap right now when you look at its
price-to-earnings multiple divided by its expected long-term growth rate, a measure known as
the PEG ratio. Companies with PEGs below 1 are generally considered inexpensive because it
means they are trading at a discount to their expected growth rate. About.com's PEG is .48.
MORE BARGAINS
About.com is not alone. Several Internet stocks now trade at attractive valuations based on real
earnings multiples. ("Internet stocks" and "earnings" in the same sentence? Imagine that!)
Register.com (Nasdaq: RCOM), a competitor to Network Solutions in the domain name
registration market, is now trading at a PEG of just .45, with an expected long-term growth rate
of 80 percent and a price-to-earnings ratio of only 36 times 2001 estimates. Register.com
recently agreed to acquire Afternic.com to bolster its presence in the domain name resale area.
Two Web consultants are now looking quite thrifty these days, as well. The entire sector was
decimated following an earnings warning from Viant (Nasdaq: VIAN) and a slew of analyst
downgrades. But Razorfish (Nasdaq: RAZF) and Marchfirst (Nasdaq: MRCH) may have been
unfairly pummeled. Razorfish trades at just 18 times 2001 estimates. With an estimated growth
rate of 50 percent, its PEG is .36. Marchfirst also has a PEG of .36, with a multiple of only 13.5
times 2001 earnings estimates, even though earnings are expected to grow at a 38 percent clip.
It is often said that the market is efficient. That may be the case in the long term, but in the
short term, the market is more chameleon-like than Madonna. (And what's up with her new
cowgirl motif?)
For instance, investors have punished so many Internet companies that it's a tad odd. At the
same time the market is infatuated with infrastructure companies that make products to improve
the Internet, companies that actually do business on or related to the Web are being scorned.
That's why I think these are truly exciting times for long-term investors scouring the dot-com
rubble for attractively valued Internet stocks with solid growth potential. Will any of these
stocks run up 80 percent in a few months? I doubt it. Investors these days are far more
interested in pump lasers and terabit routers than eyeballs and vortals ... until the next big thing
arrives, at least. |
