The glut of Internet companies has revealed one simple fact -- some just don't deserve the .com tag. But that hasn't stopped wannabe Internet businesses from trying to reap Wall Street riches with a simple .com.
There are so many .com companies out there that most analysts now dub the fill-in-the-blank.com moniker a cliche. And the performance of Internet stocks and IPOs definitely indicates a glut.
Nevertheless, there are a growing number of companies that derive the majority of their revenue offline, but pretend they are Internet players.
|Should there be a crackdown on pseudo.coms?|
And it's all perfectly legal. According to Securities and Exchange Commission spokesman, Duncan King, the .com mania in corporate names is allowed as long as companies don't make "fraudulent or misleading" claims.
Translation: As long as the company derives any revenue from Internet-related activities it can use the .com. That percentage can be one percent, 20 percent, or 100 percent. Or the company can just plan to grow into a .com.
What's an investor to do? Read the SEC filings. Seldom do companies willingly acknowledge they don't deserve the .com, but often indicate a revenue split in filings.
"At least 50 percent of revenue should come from the Internet, but it should be closer to 75 percent. To be a true .com you need 100 percent," said Steven Tuen, director of research for IPO Value Monitor.
Someone forgot to give Mapquest.com Inc. (Nasdaq: MQST), Comps.com Inc. (Nasdaq: CDOT) and the soon-to-be-public GreenMountain.com Inc. the memo.
Mapquest is among the most successful pseudo.coms to go public and make a successful splash before retreating amid a broad sell-off. Mapquest has strong Web offerings and is very helpful to Internet users. Distribution through Yahoo! and other major distribution hubs is also a plus.
However, Mapquest derives 68 percent of its revenue from its offline digital mapping business, according to the company's prospectus. The digital mapping business was started in 1989 before the Web was even born.
"Mapquest has been around a long time. Too long to be a pure Net company," said Tom Taulli, a market analyst for Edgar Online, which recently went public and got a rude reception. "Typically Net companies have only been around three years."
The good news for Mapquest was investors bought into it. The company jumped from to a high of 28 after pricing an IPO at 15 a share. Mapquest is hovering just above its IPO price even as its underwriters try to talk up the stock.
Comps.com wasn't so lucky. Comps.com, which publishes and maintains a database of real estate information, is known 1999's first "broken" IPO, meaning it fell below its offering price on the first day of trading.
The company transformed itself from Comps Inc. to Comps.com and went public, but hardly deserves the .com.
For the first quarter ending March 31, 35 percent of the company's sales derived from the Internet-related activity. In 1998, 10 percent of Comps.com's sales came from the Net.
And the worst is yet to come. GreenMountain.com has filed to go public and is already notorious for pushing the .com naming convention to the limit.
GreenMountain sells environmentally friendly electricity through the Web. To date, more than 99 percent of the company's sales have come from electricity products in Pennsylvania and California.
Analysts said GreenMountain, the online arm of Green Mountain Energy, is essentially an electric company with a Web site. "That's all it is," said Taulli. "If you're a company without visibility, you might as well cast yourself as a .com"
How long will this .com abuse last? Not too much longer. Dot-com is becoming a cliche and the market is obviously catching on. But soon you'll be noticing a lot more "Online," ".Net" and "e" tags popping up.
Odds and ends
A few things to ponder on this trading day. Newbridge Networks (NYSE: NN) should take a hit today. The company made a big Wall Street boo boo after market close. The company lowered estimates and still tripped over them. Adobe (Nasdaq: ADBE) is worth keeping an eye on. Trading was halted on Instinet for pending news. Given Adobe's track record, expect the worst.
And finally, we have Merrill Lynch. The chances of this behemoth launching its online trading by Dec. 1 are pretty slim. Systems need to be installed and Merrill has to completely overhaul its thought process. Merrill also gave its online competitors a six-month heads-up on its plans. If Merrill misses its deadline, it will be much more embarrassing than its change of heart about online trading.