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In the interests of full disclosure, I don't spend much time on the women-oriented Web site iVillage. I also don't read women's magazines or watch a lot of women's programming on cable for that matter. But I am interested in iVillage (IVIL) the company, which has become something of a poster child for everything wrong with Internet stocks.
It has been criticized for its high-flying initial public offering, followed by ongoing quarterly multimillion-dollar losses, lavish spending on marketing, and high management turnover (it recently lost its chief financial officer and chief operating officer). Its ambitious, high-profile CEO Candice Carpenter also takes her share of jabs.
But clearly one of iVillage's biggest problems is its imploding share price. Unlike many other big Internet names, iVillage began its steep slide well before April's Net-stock crash. It has basically been falling since last July, when it reached a high of $68. In context, the latest drop looks simply like part of the general continuum. And while other Internet names have leveled off in recent weeks, iVillage has continued to slide, touching a 52-week low of 6 7/8 on May 24 and rebounding slightly May 25 at 7 11/32.
SHOOT IT.
Few companies have attracted more hostility from investors recently. Message boards are filled with unprintable vitriol. Investing pros are barely civil about their skepticism. Asked during a May 25 conference call with the media whether he thought iVillage had a shot at success, Alberto Vilar, founder of Amerindo Investment Advisors, quipped, "The question is when is somebody going to put a shot into it." He later backtracked, but added he had never invested in the company and didn't want to "be one of the people who puts the last shot into it."
That said, what makes iVillage interesting to look at now are its good points -- and believe it or not, it has quite a few. "The stock price right now is virtually assuming failure," says Darren Chervitz, an analyst with Jacob Internet Fund, which holds the shares. "Obviously, we don't think that is the most likely scenario. Is it a possibility? Sure. But we think they've performed fantastically."
"This is a classic case where we have to try to differentiate between the company and the stock," says Safa Rashtchy, an analyst at U.S. Bancorp Piper Jaffray. "I am positive on the company."
STICKY SITE.
iVillage has about 5 million women visiting its site each month, giving it a reach of nearly 10% of all Internet users. While its content has been criticized as lightweight, there's no disputing it has built a large audience. Many women go there to chat online with other women and end up spending a long time on the site, earning it praise for being "sticky," in Web parlance.
Advertisers want to reach its audience -- primarily women age 25 to 54 who control most of the spending in U.S. households. And iVillage allows marketers to further segment that audience by selling spots on specialty channels, such as pets, health, and finance. This lets iVillage charge higher advertising rates, a strategy that industry analysts recommend and other second-tier portals mimic (see BW Online, 5/25/00, "What's Left for the Portal Also-Rans?). Carpenter claims the site's average ad rate of $45 per 1,000 page views is among the industry's highest.
That traffic and targeting also allows iVillage to ink complex multimillion-dollar partnership deals with major companies such as Ford, Unilever, and GE. (Some of these deals, which link content with sponsorship, raise journalistic questions about keeping advertising separate from editorial, but that's another story.) It also has valuable brand- and traffic-building partnerships with America Online and NBC.
PLENTY OF FUEL.
Don't laugh, but its financials are actually improving. Yes, a $25.2 million net loss the first quarter was hardly something to boast about. But it was better than analysts were expecting and down from the $30 million loss the fourth quarter of last year. First-quarter revenue grew to $20.8 million, up from $19.3 million in the fourth quarter. Most important to analysts, its cash flow improved 25% in the quarter to a negative $14.3 million from a negative $19 million the preceding quarter. "We're just getting to the scale where you can begin to see real operating leverage," says Carpenter.
With $93 million in cash at the end of the first quarter, an estimated "cash burn rate" of $10 million a quarter, and a goal of becoming cash-flow positive by the middle of 2001, the company isn't in danger of going under, analysts and Carpenter agree. "We're not really vulnerable to financing concerns," she says.
True, analysts rarely trash companies they follow, but when a stock is in the tank, they will at least raise questions. Yet some on Wall Street are still surprisingly bullish given the stock's steep slide. Most analysts rate it a "buy," primarily because of its low valuation. With a market cap of $240 million and expected revenues next year of $164 million, Rashtchy estimates it's trading at just under two times revenue. The typical media company is trading at 10 times future revenue, and a market leader like Yahoo! is trading at 54 times next year's revenue. But Rashtchy also points out that almost half of all media-related Internet companies right now trade at just two times revenue.
TAKEOVER BAIT?
Chervitz thinks iVillage could trade three or four times higher once the company proves it will succeed. "This is how media models evolve," he says. "You spend a lot of money building a brand and an audience, you reach critical mass, and then the model becomes very profitable."
Jordan Rohan, an analyst with Wit Soundview, says iVillage should focus on cutting expenses. He expected the company to build its reach faster and thinks it will have to claim as much as 30% to 40% of the Internet audience to reach the kind of scale that creates big profits. "Right now, my projections are that growth is flattening out," he says. To win back investors, he thinks it should trim costs and aim to break even by the fourth quarter of this year. Nonetheless, with the stock priced for imminent failure, he still rates it a "buy." He asks: "At this price, how could I not?"
At least part of Rohan's and other analysts' "buy" recommendation comes from the conviction that iVillage is ripe for acquisition. "I still believe that it would make sense as part of a larger media company," he says. Rashtchy agrees it could be bought, as was rumored earlier this year. "It has some pretty interesting assets that would be valuable for a company that can operate at a much lower expense level with higher margins."
Carpenter admits she's in conversations daily with other companies about many potential partnerships, but she says she "built the company to be profitable as a stand-alone media company." Perhaps. But judging by the stock price, not enough investors are convinced she can do that. Analysts say the profit outlook is on track, but to lift the share price, iVillage will have to show not just that it can make money but that it can make a lot of money. Until Carpenter can prove that, few investors will want to own the stock at any price.
Stone writes about the markets for Business Week Online What's your take on iVillage? Talk about it on our Ask Amey Stone Forum EDITED BY BETH BELTON
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