More reasons to short USWB (from thestreet.com)
<<When this column first wrote about USWeb (USWB:Nasdaq), just prior to December's public offering, the question was whether the web design/consulting firm would be the ultimate speculative stock. Back then the two-year-old company, with an accumulate deficit as of $35 million as of June 30, was trying to raise $63 million.
Silly skeptical journalist. Not only did the deal go off without a hitch, but the cash hungry company and its anxious insiders are already back with their hands out for more. So what if the deficit is now up to $72 million? So what if the company will incur "substantial" operating losses at least through the end of this year? So what if, after the latest deal, its market cap will be around $800 million (for a company that last year had revs of a mere $18 million)? So what? So what? So...so, it really doesn't matter because investors are so hungry for USWeb's stock that late yesterday its bankers added 950,000 shares to its 5 million share add-on offering, which was priced for sale today at $22, a buck below yesterday's close. Most of the shares were being sold by insiders, including the CEO and CFO -- not usually a good sign, especially so soon after the IPO.
But can you really blame them for trying? USWeb's stock has nearly tripled since its public debut. And even to justify today's price, the company has more than a few hurdles to clear. The reason to own USWeb, according to the bulls (er, the investment banking analysts), is that the company will convert itself from a low margin web designer (last year its gross margin was 16%) to a high-margin web consultant (this year's target is 28%.)
But to do that, it'll first have to prove there's more to its biz than a string of $50,000 web-design gigs -- and that it can build up its fixed-fee biz. In its prospectus, the company touts strategic relationships with Intel (INTC:Nasdaq), Microsoft (MSFT:Nasdaq), Reuters (RTRSY:Nasdaq), Hewlett Packard (HWP:NYSE) and Sun Microsystems (SUNW:Nasdaq). However, buried beneath the company logos is the warning that those deals are "typically terminable at will by either party," and the loss of even one could have the ole "material negative" impact. (Don'tya wonder what ever happened to good, old-fashioned contracts?)
Furthermore, there's the question of management: CEO Joe Firmage, who pulls down $200,000 annually, hardly has a proven record in the service industry. He's just 27 years old, and before co-founding USWeb he worked at Novell (NOVL:Nasdaq), which he joined after Novell bought Serius Corp., another company he started.
The strategy at USWeb is growth by acquiring small, regional web design firms. So far the company has already made 19 purchases. Another dozen or so are on tap for this year. Can Firmage successfully merge those operations without disrupting the company's internal growth? That's a daunting task for even the most experienced execs.
Then there's the issue of USWeb's stock, which trades at 44 times last year's sales, compared with a company like International Network Services (INSS:Nasdaq), which has a 55% gross margin -- roughly twice USWeb's -- and trades at just 9 times sales. USWeb has reason to want the stock that high: it's the currency of choice for its acquisitions, just as it was with CKS Group (CKSG:Nasdaq), an Internet advertising company. CKS, which also does web design, was one of last year's sweethearts, rising all the way to 46 1/4 before a dose of bad news gave investors a dose of reality. It's now 18 1/2 -- an improvement, however, from its post-bad news low of 11 3/8.>>
Dave |
