Thursday April 13, 4:45 pm Eastern Time
Individual Investor
Internet: Six Dot Coms Too Cheap to Ignore
Dave Sterman and Dave Peltier (4/13/00)
A lot of time has been devoted in recent months to the plight of many Internet companies that are realizing just how difficult it is to make money. On a few occasions we've highlighted firms that are facing increased competition and burning through their cash with little chance of securing additional financing.
Investors are getting sick and tired of firms not living up to their growth expectations, and venture capital is rapidly moving to find the next hot industry. We have already seen the rise and fall of B2C and now B2B stocks, and all of the recently coined terms that describe the sub-sectors within these groups.
While the 10 largest cap Nasdaq stocks are the ones that actually caused the 25% decrease in the Nasdaq Composite, there are, in fact, many Internet stocks that have fallen much harder from their recent highs.
Using the FactSet database, we searched the 729 domestic, publicly traded Internet companies for stocks that were down 75% or more from their 52-week highs. To make sure that these stocks were still on some radar screens, we eliminated those whose market cap had fallen under $100 million or shares traded under $5 a piece.
We came up with is a list of 55 that you can see by clicking here.
Then we took the long list and boiled it down to our investment opinions on six well known names within the group which, while out of favor now, stand a good shot of recovering once the Street sorts the wheat from the chaff.
AGENCY.COM
Agency.com (NASDAQ: ACOM - news) helps companies establish a comprehensive strategy for capitalizing on new technologies such as e-commerce and wireless communications, but it is in serious need of help from investors. With offices around the world, the company spots new technology trends in certain regions and helps spread them to other areas.
After a wildly successful December 1999 initial public offering that saw the company's shares rise from $26 to $98, the stock has been in freefall down to Wednesday's closing price of $18.81. As a result, the shares trade for just 7.5 times trailing revenue of $88 million\227a price-to-sales multiple that is half of the peer group.
But Agency.com's unique strategy should allow it to survive and flourish in the years to come. While competitors are focusing on snatching one-time development contracts from a lot of Web upstarts, Agency.com is locking in long-term deals with multinational blue chip firms.
In early April, Prudential Securities' Ellen Battiggi picked up coverage of the company with a Strong Buy and a $47 price target. She wrote that ``We believe that firms offering such integrated solutions will be the ultimate winners in this very lucrative space. We are forecasting organic revenue growth at a compound annual rate of 41% during the period of 1998-2002, with a revenue estimate just shy of $300 million in 2002.'
Two catalysts should help give the shares a lift. The March quarter is trending well, and the company expects to surpass the $31.5 million revenue estimate. If it could do so by 10% or more, the stock should get a nice pop. More intriguingly, Agency.com has developed an alliance with Sun Microsystems (NASDAQ: SUNW - news) and Intel (NASDAQ: INTC - news) that will bring in new clients. Employees at each firm are being cross-trained right now, and new revenue should begin to flow in by this spring. That would coincide with a seasonal tailwind, as Agency already sees its strongest growth in the June and September quarters.
At the end of December, Agency.com had $85 million in cash, thanks to the recent IPO.
The company is expected to be profitable as soon as the June quarter, indicating that the company will be around, long after many other startups have burned through their rapidly-dwindling cash balances.
ETOYS
About six months ago eToys (NASDAQ: ETYS - news) might have been the last company many people thought would end up on this list. The company was just heading into the holiday season, in which it dominated much larger competitors that had trouble leveraging their brand names to a critical Web presence.
The company was very successful in building its brand last year, but its order fulfillment was downright terrible during the holiday season. To address that shortcoming, the company is expanding by building two new fulfillment centers on opposite sides of the country, and you are seeing a lot fewer commercials.
If the site is nearly as profitable as it was last season, then the company should be better equipped to handle its orders.
Looking back, it's really amazing that eToys traded for $86 back in October. The company came out and said last month that it has enough cash to last through December, but many analysts don't think that the company can make a profit until 2002. Hopefully by then management can get the stock price back high enough to fire off a secondary, or the company will need to look toward a debt offering or private financing.
There is always the possibility that eToys is an acquisition target at these levels, and it would admittedly be a steal for a company like Amazon (NASDAQ: AMZN - news) to come in and get their nearly 2 million customers for a song.
But chief executive Toby Lenk seems rather committed to his cause, and is not likely looking for an exit point yet. In any case, the premium would do nothing to please any investors who bought the stock six months ago.
Click here to see our list of 55 undervalued Internet stocks.
FATBRAIN.COM
Fatbrain.com (NASDAQ:FATB - news) is another beaten down high flier that should soon see better days. We chronicled the company's ongoing developments in a recent update.
Shares of Fatbrain.com continue to trade very poorly as Internet stocks are falling increasingly out of favor. But this company had been hit especially hard, after announcing that its eMatter division had gotten off to a slower-than-expected start. The company has recently taken steps to shift eMatter off of its balance sheet, which should soon let the strong growth in its core online bookstore business shine through. And the company's new comprehensive document management initiative appears to be gaining traction.
After signing Andersen Consulting to a far-reaching contract, the company recently announced that Wells Fargo had inked a deal. CEO Chris MacAskill expects other firms to sign on in the months to come as well
In early March, Fatbrain reported results for the fiscal fourth quarter ended January. Sales of $11.85 million were ahead of expectations, and represented a 19% sequential jump. Analysts expect revenue to jump roughly 20% every quarter on a sequential basis throughout the current fiscal year.
But the $10 million quarterly cash burn rate remains a concern. As of the end of January, Fatbrain only had $20.7 million in cash and securities\227enough for only two more quarters.
The company was hoping that a rising stock price would help facilitate a secondary offering. But now it's more than likely, the company will have to proceed with a private placement, diluting the current share count. Once Fatbrain shares resume climbing, the company will be better-positioned to pull off a secondary.
As word circulates of Fatbrain's new strategy, the stock should climb back into the $20s in the near-term, and possibly well higher over the long-term.
HEALTHEON/WEBMD
While Healtheon/WebMD (NASDAQ: HLTH - news) is a stock that we have touted in the past, but has fallen in recent weeks over increased competition and Internet privacy issues.
The company has made a ton of acquisitions over the last 18 months, and there have been some doubts lately as to how it will manage these going forward. In fact, Healtheon has purchased all of its existing serious competition. The company is also going to be facing increased competition though as last week a few HMOs said they will form their own order processing unit. There is still plenty of room for growth though, considering that currently only 10% of medical claims transactions are carried over the Internet.
The downfall of related sites like drkoop.com (NASDAQ: KOOP - news) should actually help Healtheon, because it faces the daunting task of breaking into three different industries. On top of taking in claims, the company is also looking to be a general medical advice site as well as the portal for health information on the Web.
Recent questions to Healtheon's cash burn rate carry little weight when you factor in the over $1 billion that the company has recently taken in investments. The company is currently slated to burn through about $218 million of that this year, a number that should decrease going forward.
The stock hit a high of $126.19 last May, and still could have been had for $71 earlier this year. At $23.75 per share the stock offers a compelling entry point, for what looks to be a long-term Internet success story.
Click here to see our list of 55 undervalued Internet stocks.
MYPOINTS.COM
Mypoints.com (NASDAQ:MYPT - news) is another stock that remains severely undervalued. In the last few quarters, the company has blown out revenue estimates and has been growing at an 80% plus sequential clip. But the more impressive the results, the more the stock sinks. Back on March 13, the stock hit $70 on an intra-day basis. A month later, the stock fetches $18.
In a nutshell, Mypoints offers a rewards program that enables users to earn points every time they visit an affiliated Web site. Those points can then be exchanged for goods, both online and off, a ``clicks and mortar' strategy if you will. Month after month, an increasing number of Web surfers sign up for the company's rewards program. According to Media Metrix, Mypoints.com had 4.8 million unique visitors in February, which helped it rank fortieth among all Web sites.
The company gathers voluntary personal data from its users, and has assembled a highly valuable database, which is licensed to other firms. Mypoints promises not to reveal the specific answers to its clients. Instead, Mypoints slices and dices the data to give general feedback regarding consumer spending and browsing habits.
When the company reports quarterly results on April 25, look for another top line blowout.
But right now, everybody's focused on the bottom line. Mypoints is expected to lose $51 million this year, and another $30 million in 2001, before being profitable in 2002. The company was lucky enough to complete a $105 million secondary offering before Net stocks tanked. That's in addition to $21 million in the bank at the end of December. So bankruptcy isn't a concern, but management may have to accelerate its timetable to profitability before investors pour back into the stock.
STAMPS.COM
Stamps.com (NASDAQ: STMP - news) offers a great way to play the Internet, if you believe that the $58 billion (1998) domestic postage market is moving online. Most importantly for the company is that its competitive advantage is protected by its approval from the U.S. Postal Service. It could be another year before a viable competitor will enter the market.
The company just reported first quarter numbers, which saw Stamps post $2 million in revenue. The company is projected to record total sales of $24 million in fiscal 2000, and $75.6 million in 2001, a 217% increase.
Besides prepaid postage, the company is also looking to branch out into offering other shipping supplies, and even has software that will let customers print out other pre-paid items like event tickets.
Stamps closed the quarter with over 187,000 registered users for its small businesses service, a number that is projected to be 700,000 by the end of the year.
Stamps has $368 million in cash, or enough for at least three years at current burn rates. The company was lucky enough to get off a secondary in December when the stock was at $65.
The stock traded as high as $98.50 per share around Thanksgiving, and now fetches a mere $11.75. At its current price the stock trades at 20.8 times fiscal 2000 revenue and 6.6 times next year's projected sales. |
