"I think five or ten companies will end up doing reverse-axel dismounts,
if you know what I mean." [Bill Gurley]
[ URL: worth.com
An article worth reading, here's a few highlights ]
Risks are high, too, because only the very best internet companies will thrive--or even survive
98/08 - Investing In Internet Companies
Stakes Are High
By Clint Willis
Not long ago, i heard from a former investment banker who
wanted to--get this--offer me equity in an Internet start-up.
The proposed deal went something like so: If I would write
some financial stories for his new company's Web site each
month, I could have a piece--say 5 to 15 percent--of the
whole shebang. Intrigued, I asked him what he thought such a
deal could be worth to me. "We figure we can sell the
business in a year," he shot back. "People are paying, like,
100 times revenue for some of these companies. We're
thinking we can get our revenue up to $2 million--so that's
worth $200 million. Think about it. I'll call you next week." _ I
hung up and thought about it. What I thought was that when
people start promising me a chance at 15 percent of $200
million to write a few online articles...well, it says something.
....
Some investors should shun Internet stocks. Bill Gurley is a
partner at Hummer Winblad Venture Partners in San
Francisco--an early investor in such Internet companies as
Employease and NetGravity. He spends his time looking for
technology companies to finance; these days, almost all of
them have some tie to the Net. His conclusion: "For every
Yahoo!, I think five or ten companies will end up doing
reverse-axel dismounts, if you know what I mean."
...
Some analysts look elsewhere for clues to an Internet firm's
value-- revenue, perhaps, or (for a company such as America
Online) subscribers. But let's face it: No one really knows what
these firms and their stocks are worth. "I think we're going to
look back in five years and extract a historical model that says
how we should have valued these companies," says Tom
Kippola, a Silicon Valley market-strategy consultant and co-
author of The Gorilla Game: An Investor's Guide to Picking
Winners in High Technology. "But until then, I don't have a
clue."
...
Start with early-mover advantage. The first--or at least the
early-- companies to arrive on the scene in an Internet niche
often have an enormous advantage over latecomers. For
example, content distributors such as AOL and Yahoo! have
used their head start to begin gathering users, known in the
trade as eyeballs. Likewise, online retailers can move quickly
to buy "real estate" in the form of exclusive agreements with
other Internet sites--as Amazon.com has done. Those sites
contain automatic links that refer users to the bookseller's
site.
...
Part of the genius of the AOL business model is that
subscribers who get to the Internet through AOL keep racking
up AOL minutes even after they've left AOL's content behind.
So AOL can say subscribers spend an average of 450
minutes on the site each month. (Yahoo!, by comparison, can
claim only the time the average user spends directly on its
site--28 minutes a month from home and 43 from work.)
Frequent and intensive users of a site make its real estate
more valuable, of course; these days, AOL's partners pay
increasingly large sums for links to and from its site. For
example, Barnes & Noble paid $40 million to ensure that when
AOL subscribers are reading about, say, Southern cooking,
they are invited to click through to the bookseller's site and
order books on the subject.
...
E-commerce
this is the most intensely hyped sector of the Internet. A
Forrester Research survey of 120,000 consumers found that,
by the end of 1998, 10 percent of all American households
will do some shopping and investing online. That's a doubling
in just one year.
That said, fierce price competition makes it all the more
crucial for firms to meet the criteria we laid out at the start of
our search: factors like early-mover advantage, brand
recognition, and innovative management. Only companies
that can deliver on those counts will be able to generate
sufficient volume to earn large sums of money.
As for pure plays, this sector is loaded with them. The huge
potential market has attracted thousands of start-ups. The
most promising companies are concentrated in areas such as
books, music, travel, and financial services; it's tougher to sell
things such as clothing and real estate online.
Processing analysts' E-commerce favorites is like wading
through a school of fish; there are lots of them, and they tend
to look alike. But Preview Travel (Nasdaq: PTVL, $32.50)
stands out. Thanks to Amazon.com, everyone knows books
sell well on the Internet. But industry research firm Jupiter
Communications figures that online travel will sell even better.
Jupiter predicts sales in online travel booking will grow 87
percent a year through 2002, making it the biggest consumer
commerce area on the Internet. Preview is ideally positioned
to increase its leading market share as more people discover
the convenience of booking travel online, which includes the
ability to do extensive research about potential destinations.
Preview entered the market in 1995 as a vacation-planning
site and added direct booking two years ago. President and
CEO Ken Orton has moved quickly to stake out a position for
Preview as the market leader, signing five-year exclusive
agreements with AOL and Excite in September 1997. In March
1998, Orton added Lycos to Preview's list of alliances with a
two-year, $4.25 million distribution agreement, then in June
signed a deal to make Preview the exclusive travel provider
for SNAP, the search engine for such large ISPs as EarthLink,
MCI, and Sprint.
That gives Preview agreements with four of the top nine
Internet portals. Those agreements should help the firm
continue to grab eyeballs as those 25 million new Net surfers
come online in the next three years. Since most of those
users won't know their way around the Net, they'll start with
portals such as Excite and AOL, which will bundle them off to
Preview when it's vacation time.
Already, Preview has twice the traffic of either of its leading
competitors, Microsoft's Expedia and SABRE Group's
Travelocity. Visits to Preview's site rose 64 percent during the
first quarter of 1998, and revenue increased 14 percent, to
$4 million. As a result, Preview's losses declined from 88
cents a share a year earlier to 41 cents. NationsBanc
Montgomery Securities analyst and Preview fan David
Readerman estimates the company will be profitable by 2000.
Genni Combes, E-commerce analyst at Hambrecht & Quist,
looks for Preview's share price to climb to $50 in 18 months.
Software giant Intuit (Nasdaq: INTU, $61.94) comes to the
Internet wars with a huge advantage over even the most
promising start-ups. While other companies must invest
heavily to establish brand recognition, Intuit's _agship
personal-finance software, Quicken, is already in ten million
households. Thus, it has a ready-made market for Quicken.
com, where it will soon sell Quicken software online at much
higher margins than it can in stores. Meanwhile, Intuit
continues to garner revenue from the sales of the packaged
software, the fees paid by users of its online TurboTax
software, and the fees paid by banks and insurance
companies for the distribution of their products online.
New-media and consumer-technology analyst Lawrence
Marcus of BT Alex. Brown figures online distribution of
insurance and mortgages alone could be a $5 billion market
by 2000. And he notes that Intuit's brand and the superior
products that built it offer a major leg up over such
competitors as Microsoft. So does the firm's online head
start--Intuit's was the first site to offer comprehensive financial
services. That gave new CEO Bill Harris (formerly head of
Intuit's Internet strategy) time to land partnership agreements
with portals like Excite, Yahoo!, and AOL.
Those partnerships should attract traffic. For example, a user
who clicks on Excite's Money and Investing link to check stock
prices lands at Quicken.com, where he or she can shop for
mortgages, compare CD rates, look for car loans, and so on.
Intuit's partnerships with major lenders and insurance
companies mean that Quicken.com offers more online
product options than any other financial-services site.
Rapid growth? Intuit's Internet revenue increased 114 percent
(to $15 million) during the fiscal quarter that ended in April.
(Taxtime is very profitable for Intuit.) That's only about 10
percent of the company's total revenue for the quarter, but
many Intuit-watchers figure Harris will use the firm's $642
million in cash--about $12.64 a share--to continue investing in
other Internet ventures such as auto insurance and
small-business accounting. Analysts note that Intuit has not
yet gained the enormous valuations of many other Internet
outfits, largely because its store sales have been so
successful. "Right now, Intuit is at least partly viewed and
valued as a traditional, over-the-shelf software company--but
that will change," says Paul Cook. He predicts most of the
firm's revenue and profits will come from the Internet within
five to seven years.
WHERE IT'S AT: A NET MAP
CONTENT
Creators and distributors of information and
entertainment.
Our pick: America Online
E-COMMERCE
Companies that sell online--everything from
consumer retail and Internet auctions to
business-to-business commerce.
Our picks: Preview Travel, Intuit
SECURITY
Makers of products that safeguard
communications and commerce.
Our pick: Check Point Software
Technologies
SERVICES
Firms that help traditional businesses use
the Net--from Web-page design and
maintenance to advertising services.
Our picks: Harbinger, USWeb, DoubleClick
SERVICE PROVIDERS
Companies that connect users to the
Internet, such as EarthLink, MindSpring,
and Bell Atlantic.
Our picks: None. Fierce competition,
consolidation, and a variety of unproven
technologies combine to create an unstable
investment environment.
INFRASTRUCTURE
The backbone of the Internet, including
hardware and networks.
Our picks: None. The sector is dominated
by large, diversified companies, not the
pure Internet plays we're looking for. |
