If you’ve seen one dot-com business plan, you haven’t necessarily seen them all.
Though the stock market’s recent turmoil has injected a dose of sanity into the wildfire valuations fetched in recent years by Internet-based companies, there’s plenty of spark left in the market if you know where to look, experts say.
“The companies that are faring best are the ones that have solid business models,” said William Ruehle, chief financial officer for Irvine communications chip maker Broadcom Corp. “The ones where it’s a dot-com with a problematic business model and ‘maybe sometime we’re going to earn a profit but in the meantime, we’re just going to spend money on advertising and lose money for a long time,’ those companies are getting killed.”
Online retailing is probably the riskiest bet. With hundreds of look-alike firms competing for a growing but still tiny slice of retail sales, most will have to spend millions on advertising to create brand awareness while cutting prices for an increasingly thin margin.
Forrester Research predicted earlier this month that four-fifths of online retailers operating now won’t be in business by the end of the year.
Local Retailers Surviving
Online retailer Buy.com Inc., ticket broker Tickets.com and computer seller eMachines, three of Orange County’s newest public companies, say in their most recent securities filings that they have enough cash for at least the next 12 months.
But all have been hammered by Wall Street in recent weeks. Buy.com has fallen to less than $7 per share from its opening day high of $35.44, Tickets.com has fallen to less than $6 per share from its 52-week high of $32 and eMachines is worth about half of its IPO asking price of $10 per share.
Infrastructure providers,the companies that make the networking equipment, broadband hardware and wireless gear used to access the Internet are expected to prosper as companies continue their migration toward faster and ever-present connections.
Broadcom Corp., Conexant Systems Inc., QLogic Corp. and Emulex Corp.,along with smaller companies such as Irvine’s Entridia Corp. and NewPort Communications Inc.,could be some of the biggest local beneficiaries. The appetite for bandwidth is exploding, and because of dropping prices for supplies, margins remain healthy even as the equipment grows less expensive.
At the same time, service-oriented companies, which generate ongoing revenue rather than one-time sales, could continue to thrive, despite competition from hundreds of other firms doing the same thing. Because so-called old-economy companies are as eager to get online as their new-economy counterparts, demand for everything from web page design to application hosting is far outstripping the industry’s capacity to supply them.
Companies such as web design and custom programming firm eBuilt, “e-service” provider Foreshock Inc. and web monitoring firms such as Newport Beach’s SiteLite Inc., will likely have an easier time than most attracting capital.
But not every kind of Internet service will do well; standard dialup Internet access providers, which are facing pressure from a variety of free services, could have a harder time making a compelling case to investors. And depending on how successful free broadband providers such as Orange County’s FreeDSL.com become, even the premium service providers could have a tough time raising money.
Some Face Tough Road
Content-oriented companies, which have never motivated the investment community, could have an even rougher road ahead. Companies such as Troublewear.com, Synge.com and even well-financed operations such as Broadcom-backed Broadband Interactive Group, will probably face a more skeptical audience than before, at least in the short-term.
Ultimately, experts say, even the new economy has to obey a few old-economy rules.
“In a volatile, down or sideways market, it’s the better companies that get funded,” said Chris Woolley, senior vice president and Pacific Southwest regional manager for Imperial Bank. “It’s the not-so-good ones that just don’t get off the ground.” n
