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DaimlerChrysler deal fails to rev design firm's shares

Investors react to Cobalt Group's deal in a way that underscores the deep skepticism surrounding many Net companies: by sending the shares lower.

Some stocks just cannot get a break.

After the markets closed for the day May 2, Cobalt Group announced that DaimlerChrysler chose it to design Web sites for 2,100 of the auto giant's dealerships. DaimlerChrysler also said it would take a stake in the Seattle-based company that could rise to about 10 percent.

Investors reacted to the news in a way that underscores the deep skepticism surrounding many Net companies: The shares slipped the following day from $11.74 to $10.88. Two weeks later, the shares have dropped another $2.

"It's a small, illiquid Internet name, and unfortunately those kinds of stocks do not react rationally to good news," said Allyson Smith, an analyst at SG Cowen, which rates the stock a "buy."

Indeed, it wasn't too long ago that Cobalt enjoyed a little irrational behavior that sent it's stock soaring, concedes Cobalt chief executive John Holt.

When the company announced in January the launch of MotorPlace.com, a business-to-business online exchange site for dealers to trade car parts, Cobalt shares spiked to an all-time high of $24.13 on volume of 12.8 million, or about 97 times the stock's average daily volume. "That was ridiculous," Holt said

As far as the yawn from investors following the DaimlerChrysler announcement, Holt said, "I think the markets might want to see what (the deal) looks like when all 2,100 dealerships are rolled out. But that won't be until February."

Cobalt designs and hosts Web sites for car dealerships for a fee. Before the DaimlerChrysler deal, it received an average $265 a month from each of the 5,600 dealers it does business with.

The company has exclusive agreements with about 12 auto brands, such as Audi, Saab and Lexus. Dealers can use any designer they wish but receive additional features if affiliated with Cobalt. For example, a Lexus dealer that does not work with Cobalt would not be listed on the main Lexus Web page.

Cobalt reported a net loss of $3.4 million, or 20 cents a share, for the first quarter compared with a loss of $2.3 million, or 22 cents a share, for the year-earlier quarter. The company generated $9.3 million in revenue for the quarter, up from $2.5 million a year ago and $8.4 million in the previous quarter.

Auto dealers are rapidly adopting a presence on the Net. Michael Morrissey of the National Automobile Dealers Association, which recently endorsed Cobalt products for its 19,500-dealer membership, says that about 80 percent of dealers have a Web site, but of that number, just 70 percent have interactive features such as the ability to pay bills online.

Holt said dealers who are slow getting onto the Internet are shortchanging their businesses. "They have to execute," he said. "My guess is that there are lots of dealers who do not answer their emails regularly.

"Dealers are not thought of as rapid technology adopters," Holt added. "They are more 'people' people. Their business depends more on one-on-one contact."

As for the languishing stock price, Holt said he is focused on growing the business. "In a way, I just don't give a damn about what our (stock) price is now. It's not going to matter once we're making $150 million in annual revenue."

SG Cowen's Smith thinks along the same lines. She said she believes an Internet company should "go out and focus on its core business and increasing (profit) margins, then things like stock price will fall into place."

SG Cowen estimates that Cobalt will generate revenue of about $50 million this year and $75 million next year, compared with $23 million last year.