THE DAY AHEAD: EUniverse to graduate to Nasdaq, but revenue growth iffy

Larry Dignan
3 min read

EUniverse.com, a Web entertainment and e-commerce company, will soon graduate from an over-the-counter bulletin board stock to trading on the Nasdaq national market. The goal: To yield Go2Net-like results. The hurdle: Revenue growth.

If all goes according to plan, eUniverse (OTC: EUNI) will be trading on the Nasdaq national market in about six weeks with the same ticker.

Often when a company moves from the somewhat obscure, illiquid bulletin board to the national Nasdaq market it gets little attention. But eUniverse's strategy is similar to Go2Net (Nasdaq: GNET) and may warrant a glance. EUniverse, which trades around $5, has eyeballs, e-commerce and an acquisition strategy already proven to work by Go2Net, which reported strong results Thursday.

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Go2Net began trading on the Nasdaq small cap market in April 1997, graduated to the Nasdaq national market October 1998 and became one of the Internet's success stories by growing traffic via a series of small acquisitions. After about a year or so, Wall Street analysts had to notice the company following a few profitable quarters and a cash infusion from Microsoft co-founder Paul Allen.

"We definitely like their strategy," said Brad D. Greenspan, 26, chairman of eUniverse. "We think we'll be able to show value with acquisitions and traffic growth."

Greenspan noted that eUniverse is focused on what he dubbed "Generation Web entertainment," which covers Generations Y and X -- also known as 10 to 35 year olds. Although the focus differs from Go2Net, the business strategy eUniverse hopes to follow is about the same: Grow traffic through acquisitions of small properties with loyal users. Go2Net bought up thriving sites such as Silicon Investor, a booming site with three employees at the time of purchase.

EUniverse, which was created by the merger of an online CD and video store, acquired FunOne.com Oct. 13 in its fifth acquisition since April. The company's Web stable also includes CD Universe, an online music store; Video Universe, a video and DVD store; Games Universe, a game retailer; Case's Ladder, a gaming tournament community; and The Big Network, a classic game site.

Greenspan is hoping eUniverse and its 2.5 million unique users can get more exposure on the national markets. "With our shares going on the Nasdaq it will allow analysts to cover us," said Greenspan. "We're talking to analysts and waiting to get covered while evaluating a secondary."

In the over-the-counter market, quality investment research is hard to find and eUniverse's first mission will be to get analysts interested in the company. EUniverse received kudos from a small-cap newsletter called Capital Concepts and a firm called Integrity Capital. But both firms, glorified public relations and marketing firms, were paid by eUniverse for their "buy" ratings.

With that said, investors need to focus on eUniverse's filings with the Securities and Exchange Commission and there you'll find a major problem -- no revenue growth.

Most of eUniverse's revenue comes from merchandise sales, but the company said in filings it is instituting an advertising program. EUniverse also said it wants to diversify into selling clothing, sports items and other products.

There's a good reason for the diversification plan -- competition is intense in CD and video e-tailing with the likes of Amazon.com (Nasdaq: AMZN) and CDNow (Nasdaq: CDNW) fighting for customers. Indeed, eUniverse cited price competition for a 4 percent dip in revenue for the quarter ending June 30. Sales were $2 million with a loss of $1.5 million.

The trend continued in its latest quarterly earnings, the company reported revenue actually fell to $1.84 million from $2.18 million for the quarter ending Sept. 30.

For the year ending March 31, the company reported sales of $8.5 million and a loss of $407,000. The company, which plans to launch an ad campaign in a few weeks, should be profitable in 2001, said Greenspan.

But first eUniverse is going to need some revenue growth to get some attention. Internet companies have to show major top line growth to be successful. Without growth, nothing else falls into place and eUniverse will have a tough time mimicking Go2Net.