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DECEMBER 16, 2004
By Timothy J. Mullaney Net Highfliers That Inspire Vertigo Travelzoo and Jupitermedia have reaped triple-digit gains this year. So should they be in the common-sense BW Web 20? No way Hey, nobody's perfect. In starting the BusinessWeek Web 20 portfolio in 2002, I wanted to show that people could make good money investing in solid, profitable -- or about-to-be moneymaking -- Internet companies that had survived the tech bust in style and were about to bust out. We called it the Real World Internet Index back then, to drive home that investors should seek out the exact opposite of some tiny, barely profitable or unprofitable company with a valuation that made Jack's Beanstalk look like so many ground-hugging pachysandra. But now, I look at a list of the year's top-performing Net companies and it makes me sniff. Of the 20 best performers, counting companies that have traded all year, only one is in the Web 20. What kind of fool am I? STILL BUBBLY. No kind of fool at all, I hope -- but I did make some mistakes. The Web 20 is up 44% since we last updated its 20 picks in August, whipping the 12% gains in the Standard & Poor's 500-stock index (see BW Online, 12/26/04, "The BW Web 20: Google Makes the Cut"). Prices in 19 of the 20 stocks are up since August, and top performers Provide Commerce (PRVD ), which runs Proflowers.com, and search-engine giant Google (GOOG ) have more than doubled. This is what you get by looking for companies that are -- by Internet standards -- reasonably stable. We juggle the index approximately every six months, dropping five or so companies that have performed badly or have been acquired. (Disclosure note: I don't own shares in any of the stocks.) Still, looking at 2004's best-performing Net stocks shows that the postbubble market still has its share of speculation and froth. Froth makes for nice eggnog -- but both eggnog and speculative stocks make for hangovers sometimes. Mostly, the year's top-performers' list is dominated by ultra-small, highly risky companies. "Obviously, the small-cap Internet plays worked this year," says Mark Mahaney, Web analyst at American Technology Research. WORTH CLICKING PAST. Tops on the list is Travelzoo (TZOO ), a nice little site for finding travel bargains. It has traded at about 350 times profits for the last four quarters. Another top performer: Overstock.com (OSTK ), the discount e-tailer. CEO Pat Byrne has waged an extended, often-profane war of words with short-sellers who point out that his company is unprofitable. Nonetheless, Overstock.com shares are up 272% this year. Are these companies whose stocks ought to be in the BW Web 20? Mostly, no. Maybe three or four names merit consideration. We actually looked hard at companies such as VeriSign (VRSN ), Infospace (INSP ), and Overstock.com in March and August before leaving them off the list. But most of the top performers are names that real-world Internet investors should skip. Here's a look at some of 2004's hottest Web plays: #1. Travelzoo. Never in my 15 years covering business have I seen a stock knifed so casually by analysts who actually like the company. Everybody admires Travelzoo, a small, spunky New York outfit with about 60 employees that runs a Web site advertising special deals from airlines and resorts. Online travel is a hot market, and online advertising is even hotter. Travelzoo gets a little of each sector's buzz rush, and it's profitable even though it's small. Share prices are up 914% this year, to just above $88 per share. But really. Through nine months, Travelzoo made a $4 million profit on $23 million in revenue, and it has a $1.4 billion market cap. Legg Mason analyst Tom Underwood estimates that the market for e-travel advertising is too small for Travelzoo to ever exceed $100 million in sales. The site mostly offers deals that suppliers have at their own sites, and the only money Travelzoo receives is the ad dollars. With fresh competition from Yahoo! (YHOO ), which recently bought a travel-search engine, and America Online (TWX ), Travelzoo has too many rivals and too little comparative advantage. Beyond that, the stock is far too expensive to be a realistic acquisition play. Both Underwood and Mahaney say it's worth $25 to $30 per share. "I've yet to talk to an investor who thinks Travelzoo merits its valuation, including management," Underwood says. "I've advised anyone who can find shares to sell them." I wouldn't buy TZOO either.
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