Slowing Traffic Growth Worries Web Watchers
Ebb and Tide of the Net
By Suzanne Galante
ABCNEWS.com from TheStreet.com
S A N F R A N C I S C O, Aug. 20 - Traffic figures show the Internet's growth has started to slow, and that has the Street worried.
Investors big and small have taken Internet stocks for a ride on the assumption that Internet growth is soaring. But now a handful of recent earnings reports suggest a disturbing trend toward a Netwide slowdown in growth.
Buried in second-quarter earnings announcements from America Online, Excite, Infoseek and Yahoo! were signs of slowing growth. That's bad just at face value. But factor in the skittish mood on Wall Street, and stunted Net growth looms even larger.
AOL Users Cut Online Time
"Two years ago, growth on the Internet was exploding. A year ago, it was on fire," says Robert Seidman, publisher of the widely read "Online Insider" newsletter. "But now it isn't doubling every six months, and that affects the Yahoo!s and the Excites."
Look at AOL. In the second quarter, its growth cooled in two ways. First, the average user spent 4 percent less time logged on in the June quarter than in the March quarter. In the same period of 1997, usage grew 5.5 percent. Second, AOL signed up 665,000 users during the quarter, a 5.3 percent rise from the previous quarter. A year ago during the same period, the giant online service expanded its base by 7 percent. Tricia Primrose, a company spokeswoman, said strong second-quarter growth in 1997 was fueled by a change in monthly pricing plans, so year-over-year comparisons are hard to make.
Slow, But Still Growing
But traffic growth across the heavily trafficked portal sites, which wouldn't be affected by AOL's pricing changes, also tailed off in the most recent quarter. Yahoo reported traffic growth of 21 percent from the previous quarter, the slowest in the company's history. In the same period a year ago, Yahoo!'s traffic rose 27 percent. Excite's traffic rose just 10 percent, down from 33 percent last year; Infoseek's traffic actually fell 8 percent, against a 31 percent gain last year.
Each company tied the slower growth to summer, typically a sluggish season for Net traffic. But when asked why traffic growth this summer was slower than even last summer's, only Yahoo! offered an explanation.
The Law of Averages
"The bottom line is that the law of big numbers is kicking in," says Gary Valenzuela, Yahoo!'s chief financial officer. "Clearly, as the numbers get larger, to maintain the same potential growth is more and more difficult. But we are still very early on in the adoption of the Internet."
And revenues and earnings are on the rise. In Yahoo!'s most recent quarter, for example, the company reported operating profits of $8.1 million, or 15 cents a share, compared with a loss of $300,000, or 2 cents a share, in the second quarter a year ago. Revenue reached $41.2 million, nearly triple the year-earlier's $14 million.
What About Stock Value?
But growth is still slowing, which is worrisome this early in the game. Remember, Internet stock valuations have skyrocketed in recent months on the premise that heady revenue growth would continue for years to come.
"The trend is still a slowing trend," says Brian Oakes, an analyst at Lehman Brothers, a Yahoo! underwriter with a neutral rating on the stock. "Valuations say that this was a never-ending business. But now it seems as if there are limitations to how far the business can grow."
It's even possible that Yahoo! and others may not have gained new customers in the past quarter, though that's tough to decipher. Page-view growth might reflect increased usage from existing customers: According to RelevantKnowledge, an Internet rating service, Yahoo! had 28.6 million unique users in March, but by the end of July had just 26.5 million users, a 7 percent drop. Infoseek's unique users fell 15 percent over that same period, while Excite lost 3 percent and Lycos tumbled 12 percent. (RelevantKnowledge started tracking the numbers last September, so year-on-year comparisons aren't possible.)
Interpreting the Numbers
All in all, while page views for these companies increased, the number of people looking at their sites fell. (The companies declined to comment on RelevantKnowledge's numbers, saying they hadn't looked at them closely. Valenzuela said Yahoo!'s internal numbers show unique users are growing, as are page views.)
Traffic is the Internet's lifeblood, and it is the key to moving Net companies toward profitability. Right now, revenue growth is all investors have to bank on because the Net has mostly been an unprofitable place to operate. If growth does continue to slow, that could throw off the valuation models.
Analysts suggest the acquisitions Net companies have made to beef up their offerings to surfers can also mask the slowdown in traffic growth. Lycos recently signed a definitive agreement to acquire directory WhoWhere, even after it acquired Tripod in February. In the past year, Yahoo! bought Four11 while Excite bought Classifieds2000. Through those deals, the portals have bundled the traffic of the acquired companies in with their own.
"Those kinds of acquisitions mask the growth," says Seidman. "It makes it harder to see just the Yahoo! stuff."
"These companies are based on potential, not fundamentals," adds Seidman. "AOL and Yahoo! have demonstrated a bit of the potential (by reporting profits), but for the most part, they are not performing where they are valued. But over the next couple of years, they have to move away from potential to delivery. You can't bank on potential forever."
|
