Is Excite@Home Still a Rule Breaker?
By David Gardner
May 15, 2000
The Rule Breaker portfolio posted a strong gain today, ahead of the overall market's upward move. Our BreakerPort rose 3.04%, a percentage point in front of The Motley Fool's NOW 50 index, the broad-market index depicting the moves of today's most powerful, relevant worldwide companies.
As promised last week, and to wrap up our Excite@Home (Nasdaq: ATHM) series, I wanted today to answer the simple question, "Should we continue to hold our shares of Excite@Home?" Excite@Home, which rose 13.27% today to lead the portfolio, has been our worst presently held investment.
To attack the question, I begin first with the application of our six Rule Breaker litmus tests to Excite@Home. Doing so, we quickly see that Excite@Home is NOT, at present, a Rule Breaker.
As jat4 points out, the company lacks both a high enough relative strength (test #3) and any significant media entity that I recall in the past few months calling it "overvalued" (#6). The stock being beaten down is mainly responsible for both of these conditions. So as a stock, ATHM is not presently a Rule Breaker. If you were a prospective investor analyzing Excite@Home as a Rule Breaker, these things would be obvious.
But our own particular question is, "Do we still want to hold this stock?" Just because a company is not presently a Rule Breaker does not mean we automatically sell it out of our portfolio (as any longtime Fool knows -- otherwise we would be selling any stock anytime its relative strength dropped below 90, or anytime the company did so well that it left the atmosphere and traveled into the Rule Maker stars).
So let us consider whether Excite@Home still meets our other Rule Breaker criteria. Because the way I most often answer the question, "Do I sell this presently losing investment?" is to go back and examine why I bought it in the first place. And those reasons are largely tied up in the Rule Breaker criteria.
Top dog and first-mover in an important, emerging industry?
I continue to believe that Excite@Home's positioning as the dominant provider of cable access to the Internet puts it as the top dog and first-mover in an important, emerging industry. The acquisition of Excite, which is NOT the top dog and first-mover in its industry of "personalized Internet experience," has indeed confused the story. And confused the market. Possibly even confused the managers of the business. But the @Home part of the business -- why I invested in it in the first place -- is intact, has high relevance, a high growth rate, and a bright future.
Sustainable advantage (#2)?
I do believe that despite some exclusive agreements with cable providers ending in 2002 that Excite@Home has a sustainable advantage. This exclusivity lasts for about two years. That's a lot of time in "Internet time." Further, exclusivity running out does NOT mean that it's lights-out for Excite@Home once the deadline hits.
America Online has never had "exclusive access" to the nation's phone lines. It provided an excellent, convenient experience in a highly differentiated and branded way, and won. You don't need exclusivity to win. If Excite@Home can do a good job signing up enough people and satisfying them with high speeds and convenience, they'll stick, they'll tell their friends, and Excite@Home will maintain and even increase its market share.
I continue to believe that this high degree of emphasis on exclusivity deadlines is mis-focused. What we should be asking is "Can Excite@Home sign up enough customers quickly enough and please them?" That's the challenge. If the company meets that challenge, long-term shareholders will be rewarded from the present price.
So, exclusivity sets up Excite@Home for a while longer to earn and own market share. It provides enough "sustainable advantage" for my taste.
And yet, is the company achieving this "please lots of customers now" goal? I'm not so sure. Indeed, it appears that Excite@Home still needs to improve its efforts just to target the right customers and serve them -- them being the many who are ready and waiting for their service. One eloquent expression comes from Todd321, who says among other things, "I find it inconceivable that @Home spends as much as it does on marketing and clearly not enough on deploying service and executing. I personally am the target of both TV and direct mail marketing efforts from @Home, yet I cannot help them close a sale."
I feel this frustration in my own home market right now. After moving houses in the past year, I no longer receive cable Internet service. My new provider, in this case Cox, has been advertising it all the way through. I'd pay for it an a heartbeat. But when I go to their site or call them and make my request, as I have done habitually, I keep getting put off. "Not yet." I'm in the sticks a bit, yes... but not THAT much. And they've certainly been advertising at me for six months plus. Like Todd321, I personally am the target of both TV and direct mail marketing efforts from my cable provider, but I cannot help them close a sale for Internet service.
What about the people managing the business? Do we have a great team (attribute #4)?
I can't figure out what I think of the management team. We received some nice notes about Byron Smith, for example, but these are a small sample size and anyway, Byron is brand new to the company. George Bell? Nice guy. Smart guy. Major-league TV background. He was the somewhat successful CEO of Excite (which has never been profitable). The jury's out on George, and it's hard as well to figure out whether (now departed) Tom Jermoluk was more responsible for Excite@Home's recent problems or whether it was who we're left with (Bell), or some combo, or neither.
My point here is that I'm presently not well enough equipped to analyze the management team, and I'm increasingly dissatisfied with Kleiner Perkins as an entity backing things, too. In many ways, Kleiner Perkins and John Doerr were behind @Home and Excite, and backed and supported the merger of these two.
I will say this: I am not at present highly confident of the people managing the company, while at the same time not highly dissatisfied. I just can't tell. This is a question mark that Excite@Home shareholders must for now accept as just that.
There are some thoughts for you about the stock. As you can see, I remain hopeful, though recent events have tempered my enthusiasm. A bad stock will do that to you. I invested my money confidently in @Home back in December 1998, and what I have learned thus far (and it's a good reminder to us all) is that our degree of confidence should never be so high as to cause us to believe "we can't be wrong," or to load up on a stock (particularly to margin it -- eek!). Because in the end, we never really know how any given investment will play out, and we do well to maintain a constant, Foolish humility in the face of this very stark fact.
We watched @Home triple in value; we have since watched those profits erased, then supplanted by red ink. Fortunately, Foolish investing DOES involve some diversification and does NOT involve margin betting. For these reasons, Excite@Home has hurt us and our results, but has by no means killed us. If the company disappeared from the face of the earth tomorrow, we'd be out less than $20,000 -- less than 3% of the portfolio.
That DOESN'T mean we don't care about it -- we take our money seriously. That DOES mean, simply, that we're not sufficiently hurt (and not terribly helped, most likely) by Excite@Home's performance over the next year.
So the straw poll regarding whether or not we were going to dump the stock today was correctly answered. The analysis of Excite@Home continues on our excellent @Home discussion board.
I did want to provide a few final comments on the Byron Smith interview, so for those interested, read on -- otherwise, check out more Foolishness via our excellent (and bookmarkable) Today's Features link.
Our own TMF Nole, who knows more about Excite@Home than anyone else I've encountered, reacted this way to Byron Smith's interview, a reaction in line with mine. TMF Nole identifies some of the primary and secondary challenges for Smith and the rest of the Excite@Home management team, as confusion regarding the brand and what "Excite@Home" means to you and me and the mass market remains.
Just to make it clear, my aim in such interviews is not explicitly to ask "tough questions" or "easy questions." My aim is to ask good questions, ones that long-term shareholders would care most about. Also, in an e-mail interview format, there is essentially no immediate followup (because one can't anticipate answers); instead, each answer stands on its own for as little or as much as it's worth.
Thus, it is then up to you the reader to be impressed or not impressed by Smith's answers. If you were unimpressed, as this fellow Fool was, consider that maybe you should look elsewhere to invest your dollars! I totally agree with the notion that we as investors want to hear good, clean, accountable thinking from our managers -- we want to hear honesty, above all, and wherever possible we do not want to hear claptrap, jargon buzz, or obfuscating excuses.
I personally felt that Smith did an acceptable job answering the questions given that he had been on the job for a week. But if you were expecting more, or found yourself unable to "hang your hat" on any pegs that the manager might have provided, you should absolutely factor that in to your consideration of the company and whether or not you want to be a part owner of it.
Fool on.
David Gardner
fool.com
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Gardner was on Fool radio show this weekend saying he wouldn't add to ATHM, because "we don't add to stocks we are losing money." This was the Number two pick in the their Internet Analysis Report last year. This is as harsh as I seen Gardner on any stock.
Jack |
