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Online Extra: Grading The Class Of 2004


With confidence about the Internet rising again, the number of Web companies set to go public is surging. Five have gone out so far this year, with an additional 23 in registration, up from 14 in the last three years combined. Most are profitable, and all of them are cash-flow-positive, but some deals are stronger than others. Here's a report card:

The Valedictorians

Google

Like, duh. Some analysts think the search engine can throw off $1.5 billion in profits next year before taxes and noncash charges. That's why they're talking valuations of $30 billion or more. Over time, Google faces challenges from Microsoft (MSFT) and Yahoo! (YHOO). Whether it's a good investment, though, depends on how expensive a price it fetches in the upcoming auction. At a market capitalization of under $25 billion, the shares are appealing. Under $30 billion, they're still pretty good. Above $35 billion, Google is for pros.

Advertising.com

Fast-growing play on pay-for-performance online advertising: Instead of getting paid by the number of people who see an ad or click on it, the Baltimore outfit charges most clients only if consumers buy something or specifically ask for further sales info. Some experts predict big competition from the likes of Yahoo down the road. As with Google, its price hasn't been set yet, so valuation may become an issue.

Shanda Interactive Entertainment (SNDA)

One of the largest Net IPOs from China this year, it sells three of the five most popular multiplayer Internet games in the Middle Kingdom. Customers play in Internet caf?s, paying as little as 3 cents a minute. Shanda made $33 million on $72 million in sales last year, so the business model works. China's dot-com field is so crowded, though, that it's inherently risky trying to pick long-term winners.

Blue Nile (NILE)

The Seattle-based e-jeweler's stock price doubled after its IPO before giving back only 25% of its gains. Blue Nile's appeal? Its growth and profit margins far outstrip traditional jewelers. Blue Nile charges about 35% less than chain stores for similar diamonds, while cutting advertising and operating expenses so much that its 9% operating margin last year was nearly twice the 5% industry average (see BW Online, 6/8/04, "Blue Nile's Real Sparkle").

The issue is whether the new jewelry store from Amazon.com (AMZN), whose execs vow even lower gem pricing, will undercut Blue Nile's prices and margins. That's the first question CEO Mark Vadon will face when Blue Nile's federally mandated quiet period ends June 15.

The B Students

Shopping.com.

The online shopping service does a great job of directing consumers to the lowest prices on the Web and luring advertiser dollars to itself. So do competitors Bizrate and Nextag, both expected to go public in late 2004 or 2005. With a likely IPO valuation of nearly $450 million, Shopping.com will debut at about 65 times last year's $6.9 million in earnings. That may be cheap in the near term, since first-quarter 2004 profits rose fourfold from last year, to $2.2 million.

However, with Google building up a similar business and lots of other competition, this deal isn't quite an A student. The nagging question is whether Shopping.com really has a sustainable edge amid its many rivals.

Navteq

An interesting hybrid that sells geographic mapping data to Yahoo and Mapquest for Internet maps. But it also supplies data to automobile navigation systems and cell-phone carriers. Sales rose 64% last year, to $272 million, and profits before tax-related gain were $70 million, up from $9 million. But expenses rose sharply in 2004's first quarter, so pretax profits were flat, despite a fresh 53% year-over-year sales growth.

Taleo

Like the better-known Salesforce.com, Taleo (formerly Recruitsoft) is a play on the idea that software is better and cheaper when it's delivered over the Net and paid for as an ongoing service rather than a six-figure product that requires expensive configuration. But Taleo is less than half the size of Salesforce, and unlike the latter, it's not profitable yet. Worse, the market for software to automate hiring processes, Taleo's niche, is only about a quarter of the size of that for customer-relationship software, which Salesforce is attacking. Taleo is likely to be a profitable business soon, but any explosive upside for investors isn't obvious.

Back of the Bus

PlanetOut

With a $485 billion market of gay consumers to tap, PlanetOut managed to generate $1.7 million in e-commerce revenue last year. Most of its $19 million in revenue came from dating-service subscriptions. That has been a profitable but not very big business for Web giant InterActiveCorp's (IACI) Match.com -- and it appeals to a much larger population. PlanetOut lost less than $1 million last year, but its 2003 revenue growth was a fairly modest 35%.

The Active Network

With only $15 million in 2003 sales and a small loss, it's at least a year away from being an obvious IPO candidate. Its basic idea of managing registration online for athletic leagues and events, from Little Leagues to 5K runs, was attractive enough to land InterActiveCorp as an investor, and it has grown strongly off a small base. Like PlanetOut, its deal may not get done if Nasdaq wobbles.

Incompletes

Claria

The king of Internet pop-up advertising makes lots of money -- but its business model was just outlawed in Utah. Claria's so-called spyware, which tracks its users' Web surfing, is controversial among privacy advocates who want it barred. Web publishers say Claria's ads hijack their sites to show Claria ads instead of theirs, and seven companies have sued. Can investors buy the deal before knowing what the rules will be?

Worldspan

The services provider runs technology interfaces between airlines' reservation systems and online travel agencies Expedia, Orbitz, and Priceline (PCLN). With Worldspan's crucial Expedia deal (20% of revenue) up for renewal and Expedia shifting an undisclosed amount of business to rival Sabre, investors need more information before buying this stock. Growth already slowed in 2003, and profits fell, but its price is way up from when the leveraged-buyout group that owns Worldspan bought it from the airlines last year.

In the Principal's Office

Salesforce.com

CEO Marc Benioff got slapped by the Securities & Exchange Commission for the what-was-he-thinking move of letting a reporter from The New York Times follow him around for a day while the SEC was reviewing Salesforce's deal, flirting with rules barring promotional statements before an IPO. The SEC pressed Benioff to delay the deal, and the outfit says it has entered a cooling-off period to let the market digest any impact from the resulting story, which was published May 9. Too bad, because the numbers are very good, with $96 million in 2003 sales and near-100% growth. Many buy-siders are pumped about the deal. By Tim Mullaney in New York


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