Internet companies, burn rate could singe investors in down marketBy
Christopher Byron
MSNBC CONTRIBUTORAug. 31 ~The turmoil in world markets poses an interesting
question: If the stock market really is entering a prolonged bear market, as
many now seem to think ~ and it thus becomes increasingly difficult in the
months ahead for any but the most well-heeled of companies to raise capital on
Wall Street ~ then how much longer before the loss-plagued Internet sector
begins running out of money, and its corporate denizens either start going
belly-up or get taken over in a rash of consolidations?
ÿ ÿ
ÿ ÿ ÿ ÿAT THE MOMENT, no one seems to be focusing on that question. But
investors had better wise up quick. That,s because a look at what is known in
the IPO game as a company,s ,burn rate% ~ that is, the speed at which a
startup company eats through its short-term balance sheet reserves ~ suggests
the day of reckoning may be closer than people realize.
ÿ ÿ ÿ ÿFor some in this sector ~ most notably CyberCash Inc. ~ the drop-dead
day could arrive as soon as this coming January.
ÿ ÿ ÿ ÿIn fact, almost no companies in the sector are healthy enough to
survive on their own in a downturn. Of the group, only Yahoo! Inc., the
dominant search engine company, has enough in the way of cash reserves ($143
million as of June 30th) to ride out a long slump ~ more than a 10 year supply
at the company,s historical burn rate of $3 million per quarter. Yet even in
spite of that cushion, Yahoo,s stock price is off by more 25 percent since its
July high and closed Monday at $69.
ÿ ÿ ÿ ÿAs author Jeffrey C. Hooke points out in his newly published ,Security
Analysis On Wall Street: A Comprehensive Guide to Today,s Valuation Methods%
(John Wiley & Sons, $69.95), speculative IPOs of almost any sort ~ from the
Internet startups of today to the biotech development-stage darlings of 20
years ago ~ have almost no financial histories from which to project future
performance* which fact alone renders predictions regarding their futures
problematic. Almost no Internet company has the financial strength needed to
ride out a protracted downturn
ÿ ÿ ÿ ÿThat being so, about the only truly useful historical guide an investor
can turn to for assessing a speculative IPO,s investment prospects is the rate
at which it has burned through its capital in the past. In a rough-and-ready
sort of way, this tells you how much time the company has left before it
reaches what Sebastian Junger calls in his unforgettable saga of disaster at
sea ~ ,The Perfect Storm% ~ the ,zero moment point.% That,s the point at which
a ship in peril transitions from crisis to catastrophe and heads irreversibly
for the bottom.
ÿ ÿ ÿ ÿTo calculate the burn-rate, take the amount of cash consumed by the
business in its most recent three-month period, making the appropriate
adjustments for the trend of several recent previous quarters. Then divide the
total into the amount of cash-on-hand and liquid short-term investments
showing on the balance sheet. Result? The number of three-month periods
remaining before the company, at its present rate of burning through cash,
must seek outside financing from somewhere to stay afloat.
ÿ ÿ ÿ ÿIn a bull market, such burn-rate calculations don,t have much value
beyond that of an academic exercise. That,s because, in a bull market, even a
money-losing company can usually sell more stock if its business is in a hot
sector and its own individual story is a sexy one.
ÿ ÿ ÿ ÿBut the sexiest story in the hottest sector isn,t going to help much if
the whole market suddenly cools to speculative deals. Only those companies
with strong financials and investment-grade credit ratings are able to raise
capital in an otherwise slumping market.
ÿ ÿ ÿ ÿAnd that, in short, is the problem that may soon be facing not just a
few, but literally dozens of Internet junk-IPOs ~ companies that came public
with utterly no hope of turning a profit for years into the future if ever at
all.
ÿ ÿ ÿ ÿ
PHONY DEMAND <Picture: Microsoft Investor><Picture>broadcast.com inc. (BCST)
pricechange$35.25-2.625 Shopping.com (IBUY) pricechange$4.00+0.469 CyberCash,
Inc. (CYCH) pricechange$8.38+0.500 Excite, Inc. (XCIT) pricechange$24.00+2.250
CDnow, Inc. (CDNW) pricechange$9.00+1.250 Cyberian Outpost, Inc. (COOL)
pricechange$9.38+0.438 <Picture: LiveQuote!>Data: Microsoft Investor and S&P
Comstock 20 min.delay
ÿ ÿ ÿ ÿThese deals are being brought to market not because they make financial
sense but because of the fees to be raked off from exploiting the phony demand
that appears to exist for them. The demand is totally synthetic, fueled by day
traders and momentum players on the Nasdaq electronic stock market, who have
been taking advantage of ,buy at the market% orders placed by na‹ve Web
surfers for almost any IPO involving any Internet company with a Web site
they,ve never visited.
ÿ ÿ ÿ ÿThat,s why Broadcast.com came to market on July 27th at $15 and jumped
instantly to $57 in the after-market, climbing in little more than a week to
$63 ~ then keeled over. A month later it is now selling for $37.78, making a
loser of almost everyone who bought the stock since the momentum players and
day traders began to desert it on Aug. 7. Best evidence of just how little
real value exists in the stock? Its share price has dropped by 40 percent in
just the last two weeks ~ a period during which the Dow Industrials have
fallen by 15 percent.
ÿ ÿ ÿ ÿ
HOW LONG A LIFELINE?
ÿ ÿ ÿ ÿSo let us now turn to the ,burn-rate% concept to see how much longer
the 30 major Internet IPOs that have come to market in the last couple of
years have to go before they run out of cash and find themselves in the horrid
position of trying to sell stock on Wall Street in the midst of a sliding
market.
ÿ ÿ ÿ ÿAt first glance, the latest quarterly filings of each suggests that the
sector should be able to survive the coming downturn more or less OK, having
an average of just about 2.5 years, worth of burnable cash on its collective
balance sheet. But that figure obscures a much darker reality. Only four of
the 30 companies are generating any positive cash flow at all (Mindspring
Enterprises, Netscape Communications, Yahoo and E*Trade Group). And of the
remaining 26, five others had the good fortune to raise cash when they didn,t
yet need it (Amazon.com, RealNetworks, GeoCities, Broadcast.com and Infoseek).
ÿ ÿ ÿ ÿThat leaves 21 companies ~ a whopping two-thirds of the group ~ that
seem woefully unprepared for the financial storm that looks to be brewing.
<Picture: Enter ticker symbol or search by company name><Picture>Find company
symbol at Microsoft Investor<Picture: LiveQuote!>Data: Microsoft Investor and
S&P Comstock 20 min.delay
ÿ ÿ ÿ ÿThe weakest of the bunch: Shopping.com, a scandal-tainted Internet
retailer that went public only last November at $9 per share, then soared to
more than $39 this last April when a squeeze developed on short sellers. But
Shopping.com lacked money to continue in business without continuous infusions
of fresh capital from outside investors, and when the Securities & Exchange
Commission opened an investigation into the company,s money-raising practices,
new capital dried up.
ÿ ÿ ÿ ÿAt latest look, Shopping.com now appears to have less than $1 million
of cash left, and is burning through the stash at a rate of more than $2
million per quarter. As a result, the stock has crashed from $25 to a mere
$3.53 in the last two weeks.
ÿ ÿ ÿ ÿOr consider CyberCash Inc., which went public in February of 1996 at
$15 per share as a ,development stage company% (translation: really, really
really risky) and is now sitting with a $79 million cumulative deficit and an
$7.75 stock price. The company has $20.6 million of cash on hand, which it is
burning through at a rate of more than $6 million per quarter. The company,s
latest financial filing, for the April-June 1998 period, says it will have to
raise additional funds in the coming 12 months, but the numbers in the filing
suggest the day of reckoning may come sooner ~ probably by January or
February.
ÿ ÿ ÿ ÿExcite Inc., the troubled search engine company, isn,t in much better
share. The company went public in May of 1996 at a split-adjusted price of
$8.50 per share, soared to $53 by this last July, and since then has fallen by
more than 50 percent as investors have begun to worry that 29 times trailing
revenues is an utterly preposterous price for a company that has so far racked
up $185 million in cumulative losses, with no end in sight.
ÿ ÿ ÿ ÿExcite currently shows $39 million of balance sheet cash and easily
liquidated short-term investments on its books. But even if you leave out pre-
paid distribution fees, the company is burning through the money at a rate of
roughly $12 million per quarter, suggesting that Excite could face a cash
crunch at just about the time CyberCash will ~ which is to say, in the depths
of this coming winter.
ÿ ÿ ÿ ÿNot far behind we find Earthlink Networks Inc., an Internet service
provider, as well as Go2Net Inc., a Web-site operator, and VeriSign Inc.,
which does something with so-called Internet certificates. According to their
latest financials, all these companies ~ and several others besides ~ will
likely face a cash crunch before the grass turns green next spring.
ÿ ÿ ÿ ÿ
SUMMERTIME BLUES
ÿ ÿ ÿ ÿAfter them we come to the bunch that should begin feeling the pain next
summer. First to squeal could be CDNow Inc., a Web music retailer. This stock
sold for $35 four months ago. Today it sells for $7.75. The company,s latest
financial filing shows balance sheet cash of $47.3 million, and a cash burn
rate of $12 million per quarter. If it can,t raise additional funds in the
next 12 months, its stash will be all but gone by the end of next summer.
ÿ ÿ ÿ ÿDitto for Cyberian Outpost Inc., a Web retailer that went public only a
few weeks ago ~ thanks to BT Alex Brown and Nationsbank Montgomery Securities
~ at $15 per share, and is today trading at $8.875.
ÿ ÿ ÿ ÿAtHome Corp., which was taken public just over a year ago by Morgan
Stanley and Merrill Lynch & Co. at $10 per share, is better off. At the time
this company went public (it is engaged in providing Internet access to
consumers over TV cable lines), AtHome had already racked up cumulative losses
that now stand, as of June 30th, at $349 million. The company has more than
$200 million in cash, mainly from a stock offering two weeks ago, and is
saddled only a $9 million quarterly burn rate. (An earlier version of this
story contained erroneous burn rate and cash data for the company). The
company also has wealthy corporate parents which will likely protect it from
serious injury.
ÿ ÿ ÿ ÿMost of the other companies have cash reserves that also should last
for two or more years under normal conditions. But no one knows how badly
Internet commerce will suffer if a market downturn foreshadows a serious
economic slowdown and even a recession. Amazon.com has enough cash on hand
currently to last for three full years at its current burn rate. But this
company is already battling for customers with rival book retailers like
Barnes & Noble, and faces very large future cash outlays to diversify into new
fields of Web commerce where it might find an edge. That means Amazon.com,s
burn rate is likely to accelerate sharply in the coming year, even as cash
grows scarcer.
ÿ ÿ ÿ ÿIn sum, though some on the list are better off than others, almost no
Internet company has the financial strength needed to ride out a protracted
downturn ~ which is not surprising when you consider that, of them all, none
except Yahoo are making any money even with the economy booming* not a
comforting thought for investors wondering whether the Internet sector is a
safe place to park their money as the economy begins to shake.
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