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Internet IPOs: Zombie dot-coms rise again
Internet offerings are coming back. Let's take a close look at two stocks rising from the graveyard: WebMD and Buy.com.
By Michael Brush
Like ghouls coming back from the dead, Internet IPOs are back.
While only a few firms have announced plans for an initial public offering of shares, investment banker Lawrence Calcano of Goldman Sachs (GS, news, msgs) said at a recent conference that investors should expect more to follow.
If he's right, there will be opportunities to make, or lose, a lot of money. So it's time to prepare for the onslaught. With that in mind, we'll take a look at two remnants from the late 1990s Internet bubble, WebMD and Buy.com, that are going public again.
There are plenty of lessons to be learned from these dot-bomb survivors. Among them: Sales-to-eyeballs ratios are out, profits matter and not all Internet IPOs are created equal.
WebMD: A fallen star now on the rise
Dot-com investing veterans will recall that health portal WebMD.com was part of a notorious Internet-bubble play called Healtheon, now known as Emdeon (HLTH, news, msgs). This company was a classic Internet flameout. It came public at about $22 in February 1999 and traded as high as $120. Then it crashed and burned over the next two years. It sold recently for $10.
Along the way, Emdeon picked up new lines of business, went through a management overhaul and reorganized. In late September, it spun out the health portal WebMD Health (WBMD, news, msgs) as a stand-alone public company in an IPO.
It's a company with many of the elements you should look for in an IPO.
It's a leader in its niche, commanding solid traffic growth. And it generates what dot-com plays used to lack: profits and growth, as health-oriented consumer product companies buy ads and sponsor portions of the site.
Chief Executive Wayne Gattinella says one key to WebMD's success has been that the company kept its focus on providing quality content during the dark days. "Even when the business model was in jeopardy, we never took our eye off maintaining the trust of our users," says Gattinella. "We have invested heavily in content."
That probably helps explain why traffic has grown 41% since 2002, to 24 million unique users per month. Page views jumped 83% in the same time frame to around 200 million per month.
Those kinds of numbers are what make WebMD a leader in its space, says Linda Killian, portfolio manager of the IPO Plus Aftermarket Fund (IPOSX), which owns WebMD shares. Her fund is part of Renaissance Capital, which tracks IPO news at its Web site, ipohome.com.
Pairing ads with maladies
WebMD has limited competition, with the exception of government-sponsored health sites like those run by the National Institutes of Health. "Meanwhile, the pharmaceutical companies are going to be spending more and more on online advertising," Killian says. "So WebMD is a public enterprise that is mainly competing against the government, and the government doesn't take ads."
Because WebMD surfers come to the site with specific goals in mind, the Web site can go beyond banner ads and sell more-lucrative sponsored content. If you go to the site looking for information on a specific disease, for example, you will likely see ads for drugs to treat that disease.
"This is far superior to a 30-second TV commercial," says Killian. "The pharmaceutical companies aren't going to stop advertising on TV, but they also realize this is an inexpensive way to reach their audience."
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Drug and medical-device companies spent about $12 billion on marketing in 2004, but less than 5% of that went to online media. According to Jupiter Research, online spending for health care-related advertising will grow 19.7% annually through 2009.
WebMD also collects annual fees for running Web sites used internally by companies to help employees navigate health insurance plans. It does this for American Airlines, a division of AMR Corp. (AMR, news, msgs), PepsiCo (PEP, news, msgs) and Microsoft (MSFT, news, msgs), among others. WebMD also sells content to other sites like America Online through its WebMD Health Network, and it has a small medical publishing division. (Microsoft is the publisher of MSN Money.)
Advertising and sponsorship, however, account for 70% of revenue, which grew 59% between 2002 and 2004. Last year, the company earned $6.4 million on $134 million in revenue.
T. Rowe Price Media & Telecom fund, (PRMTX) manager and analyst Henry Ellenbogen, whose fund company owns shares of the stock, thinks annual revenue can grow anywhere in the mid 20% to low 30% range for several years. He thinks margins will expand as revenue continues to grow faster than costs.
To be sure, WebMD may have a few skeletons in the closet. Martin Wygod, chairman of WebMD and its parent company, was also chairman of a company called Synetic, later called Medical Manager, that is now part of Emdeon. Several employees at Medical Manager have pleaded guilty to mail fraud and tax evasion, and the company has been investigated for accounting improprieties.
Killian thinks these matters won't have an impact on WebMD because she believes the taint never reached Wygod. The WebMD prospectus says the company does not believe "any member of its senior management whose duties were not primarily related to the operations of Medical Manager engaged in the alleged improprieties."
Insiders including Wygod, a director and the chief technology officer have bought over $4.5 million in stock since the IPO at prices in the $23 to $24.40 range. "That is a very good indication that management is confident about their strategy," says Killian. Those purchases also might serve as a guide to a good entry point.
Don't buy this dot-com
Internet retailer Buy.com is a dot-com survivor that would be better off dead. The company, which is likely to start trading with the ticker BUYY sometime soon, is little more than an also-ran in a competitive field.
The Internet retailer -- which tries to offer prices a bit lower than what you can find at competitors like Amazon.com (AMZN, news, msgs) -- made its first appearance as a public company in February 2000. It went public at about $13 and doubled before crashing to $1. The stock continued to slide until chief executive Scott Blum took the company private at 17 cents per share.
Now it wants to come public again. We'd be hard-pressed to explain why.
First, unlike WebMD or any of the leading online retailers, Buy.com saw revenue decline between 2002 and 2004 -- to $291 million from $302 million. And the company is losing lots of money, though at least that has improved. Last year, it lost $1.05 per share, compared to losses of $1.69 per share in 2002.
Next, Buy.com will use about $5.8 million of the proceeds from the IPO to pay back debt to ThinkTank Holdings, a private equity investment group where chief executive Blum is a managing partner. Buy.com plans to raise more than $30 million in its offering.
The company has a few corporate governance red flags. First, James Watson, on the Buy.com compensation committee, is also chairman and chief executive of a company called TechSpace, in which Buy.com chief executive Blum has a 41% interest.
Next, Buy.com did over $7.5 million worth of advertising and publishing business with a company called Thinkbig Media Group from 2002 to 2004. Blum's ThinkTank Holdings is a 50% owner of Thinkbig Media. Corporate governance experts consider such arrangements a red flag, as they may represents conflicts of interest for a CEO involved in two companies that do business together.
Red flags aplenty
And Buy.com is being audited by the New York State Department of Taxation and Finance because of possible shortfalls in sales tax payments on extended warranties. The company thinks it's in the right, but Buy.com faces a potential $10 million charge if the state rules against it.
Above all, Buy.com doesn't look that different from the last time it went public -- and struggled. Yes, it has expanded beyond its niche of selling computers and consumer electronics. And last February, it launched Yub.com, an online community site.
But a list in the company's prospectus of "key elements" to its Internet retailing strategy doesn't do much to set it apart. It says it offers a deep product selection, a lot of in-stock products, low prices and a positive shopping experience -- all to help create a loyal customer base.
Does that sound any different from leaders in the space who already have better scale and name recognition? Not really. You can easily find all Buy.com's "key elements" at Amazon.com and Overstock.com (OSTK, news, msgs), the online sites of Circuit City Stores (CC, news, msgs) and Best Buy (BBY, news, msgs), or even the brick-and-mortar stores of Wal-Mart Stores (WMT, news, msgs).
"I think they are a small player in what has become a very big market," agrees Tom Taulli, who tracks the IPO news at his Web site, CurrentOfferings. "While the Amazons and the rest of the crew have built out big businesses, Buy.com hasn't. I think they will just plod along."
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