A Relapse of Dot-Com Fever?
By Russ Mitchell
May 16, 2002
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FIND THE LOGIC.
Revenues: falling. Cash stash: low. Burn rate: rapid. Bottom line: nothing but losses. Stock price: hitting 52-week highs.
Highs!
All that, and it's a dot-com, too.
Snowball.com was its name before its recent rechristening as IGN Entertainment (IGNX). Some gamblers apparently see a bright future for this media Web site aimed at video-game fanatics, but what has got them all twitchy, I haven't a clue. Maybe we're looking at different sets of numbers.
Or maybe it's a little relapse of dot-com fever.
Tech stocks rallied this week, welcome news. It would be nice to think that the Nasdaq-100 Trust (QQQ) has seen its bottom. Call me splenetic, but I don't think so.
Don't get me wrong — some undervalued tech stocks are finally getting their due. Stock pickers, for instance, are finally grasping the fact that the semiconductor market isn't synonymous with the market for PCs. Think music, games, video, cell phones, photo printers, scanners, engine controls, satellite radio, genetic screening devices, etc.
But Cisco Systems (CSCO)? Its accountants eke out a 2% blip in sales — and the stock rockets?
Or dot-coms? In just the last couple weeks, the Isdex index of 50 Internet stocks is up 13%. Some of that was warranted. Expedia (EXPE), Hotel Reservation Network (ROOM) (otherwise known as Hotels.com), even Yahoo! (YHOO) have turned out respectable first-quarter sales and profits.
If only the rally weren't so indiscriminate. Dozens of small dot-coms that managed to outlive the bubble-burst are still publicly listed, but are struggling to survive.
IGN, for one. It's a sliver of a company ($10 million annual sales) that caught my attention when I noticed it hitting record highs. It doesn't take much investigation to see that IGN bulls are letting enthusiasm for a business model blind them to the company's unproven ability to deliver business results.
IGN isn't a bad idea. Its ign.com Web site is has a lot on it if you're into computer and video games with the passion of its target customers, 13- to 30-year-old boys: It offers reviews, hint books, product news, an online game, chat rooms, message boards, classified ads, animated "babes." With a reported eight million unique monthly visitors, it's one of the top gamers' sites on the Web.
And, of course, games are a hot market, estimated at $10 billion in sales a year and growing, a hugely popular pastime for the young males advertisers are said to covet. Looks like plenty of opportunity for a popular site.
The problem is the nature of the Web itself, and the way young gamers use it, which in many ways works against a site like IGN's.
First, like most media content sites, IGN depends on advertising, which still accounts for nearly 90% of revenues. The Web ad market is showing some signs of life, but no one expects a surge anytime soon, and, in any event, hardly anyone believes that a media content site can survive on ad revenues alone.
Like Yahoo and Salon and just about anyone pushing Web content for profit (including this Web site), IGN is trying to charge subscriptions for full site privileges. IGN charges $4.95 a month or $25 a year for access to a large library of downloadable game strategy guides known as "hint books," advance product reviews, message boards, trading of goods through classified ads and a printable version of a paper gamer magazine, Unplugged.
The subscription service went up a year ago. To date, of the site's eight million unique monthly visitors, 45,000 are subscribers. David Cole, head of DFC Research, which specializes in games, is skeptical that IGN can make a go of the subscription model. "There's so much out there that is free," he says. "There are hundreds if not thousands of sites that offer hint books. Every teenager with his own computer seems to be setting up his own site," many of them not just for cheat sheets, but for chatting, trading and selling, too.
In its first-quarter earnings announcement conference call last month, IGN'a chief financial officer, James Tolonen, said the company had added 15,000 subscribers in the first quarter and is happy with progress so far. He also noted that the first annual renewals begin hitting now. Renewal rates won't be made clear until the release of second-quarter results (assuming the company chooses to reveal the numbers). But those rates will be crucial in determining whether the company can ultimately succeed.
IGN is on thin financial ice. Originally incarnated, best as I could tell, as a network of Web sites for tech-savvy youth, Snowball.com peaked at $226 a share, split adjusted, and then avalanched. Last fall, the stock was down to 90 cents. At that point, the company made clear it would scrap or sell sites such as ChickClick and HighSchoolAlumni.com (beaten to a pulp by classmates.com) and focus exclusively on IGN. That seemed to be enough to spark the spectacular run-up to the current price of $12 and change.
The restructuring took a bundle out of shareholder equity, but allowed IGN to lower its costs dramatically. Its net loss in the first quarter was $3.58 a share, an improvement from a loss of $6.76 a share same time last year. From here out, the sveltened company's net losses should continue to shrink — although the IGN says it doubts it'll make any money this year.
The most serious question for investors, however, is cash burn. IGN has $5.7 million in cash. First-quarter revenues were $2.3 million, eaten up by operating expenses of $3.5 million. With essentially no other income, cash burn is $1.2 million a quarter.
Tolonen indicated the company had done all the cost cutting it can — operating expenses will be flat for the rest of the year, he said. Without sufficient sales growth, the company will have to find new lenders or investors, or close up shop. So revenues had better grow fast.
This uncertainty is what makes IGN look so overpriced (unless there's an IGN buyer in the wings, though there's no evidence of that).
The company plans to open an e-commerce shop on the Web site in the third quarter to sell games, game machines and other goods, with inventory and customer service contracted to a third party. Because this will interrupt IGN's current e-commerce revenues, which rely on click-throughs to sites like CompUSA, Tolonen says e-commerce revenue will decline before it grows again. With the ad market so sour, that puts enormous pressure on the renewal-rate figures.
IGN may yet prevail. I wish them the best of luck. But at $12 a share, up from 90 cents in six months, I'd let that snowball roll right on by.
Russ Mitchell is a veteran technology journalist based in San Francisco. |
