Expensing Stock Options and the NVCA: Crying Wolf Is Hard To Live Down
Lee Gomes has a great piece in the Wall Street Journal today in which he correctly points out that the world has not come to an end in Silicon Valley despite a government requirement that has forced all public technology companies to start expensing the cost of their stock options.
Like Lee, I went to many events in Silicon Valley where the CEO's of public technology companies gave impassioned speeches about the evils of expensing stock options. In particular, I remember John Chambers giving a forceful speech against expensing options at the annual SDF Awards one year. As I listened to Chambers speak I was struck by A) the fact that he was an excellent speaker B) the fact that what he was saying made no sense because in a reasonably efficient market assigning non-cash expenses to stock options that the market already expected to be issued shouldn't really change the value of the company. Granted, it is a largely superfluous exercise at some level, but as far as I figured if it made public company's board think twice before they dilute their shareholders, it's probably doing more good than harm and might even make stocks go up.
That opinion was not shared by all VCs. Indeed the Venture Capital industry's main trade group, the NVCA, made fighting stock option expensing one of its key legislative initiatives under the theory that what might be bad for the potential acquirers of VC-backed companies might be bad for VCs.
As a VC, I found the NVCA's opposition to options expensing to be both amusing and distressing. It was amusing because VCs on venture-backed boards generally pay awfully close attention to options grants and are very sensitive to the incremental dilution they represent, so if anyone knows that there is a real cost to options its VCs. It was distressing because it seemed to me that the NVCA was throwing a huge portion of its political capital behind a battle that was not only intellectually dishonest and superfluous, but was really someone else's fight to begin with.
Fast forward a few years and Gnomes is correct to point out that despite all the doomsday rhetoric the tech/VC world has not imploded. More importantly, he's also correct to point out that this all ended up being a huge waste of political capital for the tech industry and I would argue for the NVCA in particular.
This is especially true in light of the whole 409A debacle. 409A is a truly mindless government regulation that creates real costs and real problems the directly impact the start-up/VC world, yet the NVCA now finds itself with greatly reduced credibility inside the beltway thanks to crying wolf repeatedly over a law that was only tangentially relevant to its core constituency. One can only imagine the hill staffers rolling their eyes when the NVCA lobbyists give fire and brimstone speeches about how 409A will kill off venture capital.
Hopefully, 409A is so brain dead and the NVCA has enough credibility left that the IRS will come to its senses, but I fear that thanks to their superfluous opposition to stock option expensing the NVCA is about to discover that crying wolf on Capital Hill is a tough act to live down.
Frank Quattrone: One Step Closer To The Truth
Today, the 2nd Circuit Court of Appeals finally brought the legal system to its senses and tossed out Frank Quattrone’s conviction from his second trial (the first ended in a hung jury). The decision, which you can read here, gives Frank the opportunity for a new trial before a new judge.
As I have written before, the case against Frank asks a jury to accept a series of laughable contradictions and caricatures that make no sense. On the one hand Frank was an omni-potent Wall Street god so skilled in high power corporate intrigue that he could easily discern the fined grained legal intentions of the government with ease, while on the other hand Frank was a panicked and lazy moron who fired off a single, superfluous 22 word e-mail to 500+ people as the sole act of an incredibly clumsy, wildly obvious and highly amateurish attempt to obstruct justice. Indeed, it would all be amusing at some level if the government hadn't disingenuously conned a jury into buying their sensationalized heap of contradictions with the acquiescence of obviously hostile and clearly over the hill judge.
As some may remember, I also wrote about the appeal last July and theorized that the appeals court would be hard pressed not to overturn the conviction. Nine months later, it’s nice to see that the failsafes on the legal system are at least partially effective, but today’s decision likely does not end this unfortunate saga of prosecutorial abuse, it just sends it into a third Act.
Following The Wrong Instructions
While the circuit court determined that a number of serious errors were made during the trial, the most serious error appears to have been some faulty instructions from the judge to the jury. Specially, the judge in effect told the jury that they could convict Frank of obstructing justice even if they did not believe that he actually intended to obstruct justice. If this sounds silly to you, just imagine how it sounds to an appeal judge. Now you can see why they tossed the conviction.
The appeals court also found that the trial judge improperly excluded a least one key piece of evidence and improperly allowed the prosecutors to pursue some clearly prejudicial lines of questioning.
Judging the Judge
For anyone in doubt as to how the appeals court really felt, they topped their whole decision off by assigning the new trial to another judge. While the appeals court went to great lengths not to criticize the octogenarian trial judge directly, it’s abundantly clear from their decision that they felt the judge made numerous errors outside of his jury instructions. Rather than address these issues in detail and embarrass “one of their own” the appeals court just heavily hinted that they hoped the next judge would pay heed to their various criticisms and make better decisions.
It should not be overlooked that the decision to assign the case to a new judge is actually a huge win for Frank as the previous judge not only had a reputation for being a prosecutor’s best friend, but he had developed a particularly evident dislike for Frank (which, having seen him in action, I can personally attest to). While the appeals court didn’t accuse him of overt bias towards the prosecution, their decision to remove the case from him indicates otherwise.
The good news for Frank is that he not only gets a new trial and a new judge, but that he will get a more level playing field in terms of some types of evidence and testimony. The bad news is that the appeals court ruled that in theory there was enough evidence presented to convict Frank and ruled that many pieces of evidence that Frank had either attempted to introduce or exclude were properly handled by the trial judge. Assuming the government does not come to its senses and drop the case, this bad news, plus the high profile of the case, seems to guarantee a third trial and that will simply prolong the tragedy of this case, making no one a winner.
Next Generation Search: Entities, Categories, and Pings
The search industry has been dominated for the last 6 years or so by one significant technology, Google’s Page Rank. Page Rank basically uses popularity as a proxy for relevancy which, if Google’s $100BN market cap is any guide, has proven to be a valuable approximation. However like many technologies, Page Rank’s hegemony is gradually wearing thin thanks to the fact that it is easily gamed and inherently limited by its derived and agnostic nature. With Page Rank’s utility declining thanks to SEO companies and “site spam” the natural question becomes what, if any, new technologies will emerge to either supplement or even replace Page Rank.
To that end, a couple of recent entrants into the search market give strong hints as to how search technology will evolve in the near future. The good news is that this evolution will significantly improve both the relevance and utility of search. The bad news is that it is not clear which company will be main the beneficiary of this evolution.
The first new entrant emblematic of this evolution is Vast.com, which officially launched its public beta yesterday. Vast is a multi-category vertical search engine with its first three categories being automobiles, jobs, and personals. Vast is similar in some respects to other category specific vertical search players, such as Simplyhired and Trulia, however, as its name clearly suggests, it has more expansive ambitions. What makes Vast particularly noteworthy is that one of the key ingredients in its secret sauce is a very advanced entity extraction engine. Entity extraction is the process of “mining’ unstructured data for key attributes (such as model of a car or the salary level of a job) which are then separately indexed. Entity extraction is much more sophisticated than screen scraping because it uses semantic inferences, and not pre-determined static “maps”, to determine what entities are present in a given piece of text.
By using the same core entity extraction engine across multiple verticals, Vast has in essence created a “horizontal” vertical search platform that is readily extensible to new verticals and highly efficient in that it only needs to crawl a given site once to extract multiple types of entities.
What does this technology do for search users? Well for one thing, it makes it a hell of lot easier to find a used car for sale on the web. Not only can a user instantly narrow their search to a specific make, model, and year, but thanks to its entity indices, Vast can also tell them what they are likely to pay for the new purchase. For example, if you are looking for a 2001-2002 Acura 3.2 TL, according to Vast chances are you will pay around $18K for the privilege. If you’re looking to get a job as a computer programmer in the Bay Area, well you’re probably looking at about an $80K salary while the same job will only net you $62.5K in Des Moines, Iowa (although you will live like king compared to the poor coder in Silicon Valley living in some half million dollar shack).
How does Vast know this? Because they have extracted all the entity information, indexed it, and done some very basic calculations. But Vast has really only scratched the surface of what they can do with this meta-data. For example, why have people search for a particular car, when they can search by a particular budget, such as “Hey I only have $20-25K to spend and want the most car for my money, so what’s out there that I can afford?” Ask that question to a standard search engine and they likely spew back a lot of random garbage. However a site such as Vast could very easily provide a highly organized matrix of all the different make, model, year combinations that one could afford for that budget without breaking a sweat. Even more intriguing, a site like Vast could just as easily start ranking its search results according to different dimensions, such as “best value”. After all, with a few basic algorithms in place, Vast will be able to spot that clueless person in Oregon that is listing their new car way below market because Vast knows what price everyone else with a similar car is asking. While the ultimate success of Vast is still an open question given that it faces a large field of both horizontal and vertical competitors, Vast clearly demonstrates the value and utility of adding robust entity extraction technologies to search and therefore provides us a likely glimpse of search’s near term evolution.
The Browseable Web
Another new search site that provides a similar glimpse is Kosmix.com. Kosmix is focused on making search results more “browseable” by using categorization technology to determine the topics addressed by a web page. Once the topics are determined, the web page is then associated with specific nodes of a pre-defined taxonomy.
For example, go to Kosmix Health and search on a medical condition, say autism. Off to the left hand side of the initial search results is a list of categories associated with autism. This list or taxonomy enables people to rapidly zoom in on the specific type of information they are interested in, such as medical organizations that are specifically focused on autism, allowing people to not only rapidly filter results for the particular type of information they are looking for but also enabling them to easily browse through different types of content about the same subject.
There have been others that have tried to do similar category-based searches, however Kosmix is the only company that has figured out how to build categorized search technology that can perform acceptably at “internet scale” and as such represents a major advance in the field.
We’ll Need A Search Running … It Has Already Begun
One last missing piece of the next generation search infrastructure that will likely enter the picture is ping servers. Ping servers are currently used mostly by blogs to notify search engines that new content is available to index. Ping servers thus greatly speed the rate at which new content is indexed. While traditionally these servers have been used by publishers to notify search engines, these servers are increasingly being used to notify end users that new content is available as well. Ping servers will become particularly powerful though when they combine persistent queries with the entity and categorization technologies discussed above.
Already today an end user can have a ping server, such as Pubsub, run persistent queries for them and then notify them, typically via RSS, of any newly published content that fits their query. Such persistent queries will get even more powerful though when they are processed through search engines with reliable entity extraction and categorization capabilities.
For example, if you are looking to buy a specific kind of used car, wouldn’t you like to know immediately when someone listed a car for sale that met your criteria? If you were a company, wouldn’t you like to know immediately if a current employee listed their resume on a job site? If you are a portfolio manager wouldn’t you like to know immediately that a blog just published a negative article on a stock you own? If you are a lung cancer drug developer, wouldn’t you like to know every time someone published a new academic study on lung cancer?
A New Foundation
Thus, ping servers combined with persistent queries filtered through entity and categorization engines will create a rich, multi-dimensional real time web search that actively and continually adds values to users while greatly limiting the ability of search engine optimization companies to cloud results with spam and other poor quality content. This may not be the whole future of search, but given near term trends it is likely to at least be a significant part of it.
Epilogue: Wither Google?
Whether or not Google can remain at the top of this rapidly evolving technical space is an open question. Indeed few remember that we have arguably had no less than 5 web search leaders in just 13 years (e.g. WWW Virtual Library, EINet Galaxy, Yahoo, Alta Vista, Google). That said, Google has hired many of the world’s leading experts in areas such as entity extraction and categorization so it will not lack the intellectual firepower to keep pace with start-ups such as Vast and Kosmix and clearly has the financial resources to acquire any particularly promising firm before it becomes too meddlesome (as Google did to Yahoo). So while the ultimate winner is as yet unknown, one thing is for certain: it will be an interesting race to watch.
Dividend Recaps: Currently Questionable, Soon to be Illegal
One of the biggest rages in the private equity world these days is the “dividend recap”. In a dividend recap, a private equity firm takes over a company with a reasonably healthy balance sheet and then levers it up dramatically, not to invest in the business or support their original purchase price, but simply to generate a ton of excess cash. This excess cash is then quickly paid out as a "dividend" to the private equity firm. While the tactic is a fantastic way for a private equity firm to improve its IRRs, it’s also highly likely to be illegal or at least financially impractical in the near future.
Private equity firms defend dividend recaps as simply a prudent use of capital and leverage however the truth is that they are really just a blatant tax dodge. You see dividends in normally run companies come from retained earnings and retained earnings are subject to corporate taxes of roughly 35%-40%. In addition, up until a few years ago, any taxable entity (such as, say, the GPs in a private equity firm) had to pay ordinary income taxes on those dividends once they received them. Thus, by the time a $1 of corporate pre-tax income made it into the pocket of an investor it was subject to somewhere between 75-80% in taxes. Not the world’s easiest way to make a buck.
Good Things Come In Threes
Three things changed all of this though. First, in 2001 Congress cut the tax rate on most corporate dividends to 15% in order to reduce the double taxation of corporate income. Second, the credit markets dramatically loosened as both short and long term rates plummeted post the 2000 bubble. Third, private equity firms were able, thanks to robust demand from LPs, to raise huge funds that were more than capable of doing many deals with little or no debt.
With their giant funds and the loose credit markets, private equity firms saw that it was now possible to raise much more cash than they actually needed to buy a given company. However, rather than downsize their equity funds (and thus their fees and carry) to a more capitally efficient size, the funds instead figured out that they could have their cake and eat it too, i.e. they could invest “too much” equity into deals enabling them to justify their huge funds and then use loose credit to support dividend recaps as a way to restore the “proper” capital structure while magically turning the recently raised debt into profits subject to just 15% net taxes (and a 20% carry!). One can just imagine all the former investment bankers at private equity firms looking over their spreadsheets and grinning while they whisper “God Bless America!”.
Too Much Of A Good Thing
The problem for private equity firms is that dividend recaps are such a great arbitrage in some respects that everyone and their grandmother is now rushing to do them. As the size and volume of these recaps increases, the prices of the underlying assets are starting to inflate, making the incremental deals riskier and riskier. Ultimately, the greater fool will push the edge of the envelope so far that he will set off a spectacular Enron-style collapse and the knives will then come out for everyone. It is in many ways a classic Wall Street story that has been told again and again and always has the same ending.
Calling All Politicians
However, even before the long hand of market takes its inevitable toll, the government may beat them to the punch. That’s because dividend recaps are basically exploiting a huge loophole in the tax code and subverting the original intention of the tax cuts. All it may take is one enterprising politician (Elliot Spitzer anyone?) and one reasonably high profile dividend cap related failure, to bring about a Sarbanes-Oxley style backlash from Washington DC. It might be a stretch to make dividend recaps illegal, but Congress can surely play with the tax code enough to make them financially impractical.
Until then, private equity firms will undoubtedly “pump up the volume” on dividend recaps in the false hope that their day of political reckoning might never come. My one piece of advice them is to stand close to the exits and watch what they put in their e-mails.
Cash Rich vs. Cash Poor VCs
One of the more interesting dynamics developing in the VC industry these days is the emerging battle between “cash rich” and “cash poor” VCs. Generally speaking, “cash rich” VCs are any VC with a fund larger than $500M while “cash poor” VCs usually have funds smaller than $200M.
Have Cash, Will Spend
Just like entrepreneurs that have raised a lot of money, VCs with large funds tend to be relatively loose with their cash. Not only do they find it easier to write larger checks up front, but they usually have a lower bar for “doubling down” on their investments and putting up more cash. In comparison, small VCs tend to be much more focused on the capital efficiency of their investments and can often take a frustratingly long time to work up the courage to write what seems like a small check.
Left to do their own separate deals, “cash rich” and “cash poor” VCs can co-exist in relative harmony, however when you mix the two together in the same deal it’s often a recipe for some real fireworks, the potential for which tends to increase exponentially the closer the company gets to running out of cash. For “cash rich” VCs, having an investment run out of cash, even one that isn’t performing that well, isn’t that big a deal (in some respects it’s actually a welcome occurrence). After all they generally have more than enough cash left to invest and can therefore easily “afford” to double down and wait for things to potentially get better.
In contrast, for “cash poor” VCs, having a company run out of money is a major issue that may require them to write a very large check relative to the size of the fund. To make matters worse, if they don’t write the check there is very good chance that their ownership stake will be wiped out by “pay to play” provisions. Faced with this dilemma, many “cash poor” VCs will push aggressively for a sale of the company. Large VCs though usually oppose such a sale because even if the company can be sold for a profit the profit won’t be large enough to “move the needle” at their fund.
Not Selling Wine On Time?
The tension between these two camps can lead to some pretty spectacular clashes. For example, a number of former employees/investors in Wine.com are currently suing the lead investor, Baker Capital, alleging that Baker purposely turned down a $67.5M buy-out offer from Liberty Media in mid-2005 so that Baker could instead do a $10M “cram down” round a few months later and wipe out the other investors. Baker claims the offer wasn’t real, but apparently there was a signed term sheet on the table, so it looks like they are headed for an interesting court battle.
If legal precedent is any guide though, the small investors in Wine.com face an uphill battle. That’s because the courts have already addressed this issue, most notably in a case that Benchmark filed against CIBC when CIBC washed them out of Juniper Financial. Benchmark's suit was subsequently tossed out by a judge in Delaware who basically said "you’re a big boy, you knew the rules when you put your money in so stop complaining".
A Few Words of Advice
Given that this tension between “cash rich” and “cash poor” VCs is real and is likely to only get worse, I have a few pieces of advice:
- For Entrepreneurs: When raising money, do you best avoid mixing “cash poor” and “cash rich” VCs. Discuss exit expectations with all investors in advance of taking their money and discuss them at regular intervals once everyone has put their money in.
- For “cash rich” VCs: Choose your co-investors wisely. Let the other investors know you investment style and intentions in advance so that there are no misunderstandings. Talk to a lawyer, for a long time, before you decide to cram down everyone else.
- For “cash poor” VCs: Pay careful attention to the other investors you are investing alongside of and recognize that when you invest alongside the "big boys" everyone, including the courts, expects you to play by the big boy rules
Virtual Stock Portfolio: February 2006
After a very strong January, the Burnham's Beat Virtual Stock portfolio was down slightly in February. The average pick in the portfolio was down 0.1% while the overall portfolio off 0.7%. This still outperformed the NASDAQ, which was off 1.1%, but was no where close to last month's 12.8% gain. This month's slight loss was almost entirely attributable to one stock, Convera, which is kind of frustrating because just about every company, including Convera, performed as expected at a fundamental level.
I am only making one change this month. I am covering my short on Entrust as it is pretty much played out at this point. This will leave pretty concentrated on the short side but I should have a few new picks next month.
Company: Microstrategy Ticker: MSTR
Sub-sector: Business Intelligence
Investment Thesis: I like the BI space in general and have been keeping my eye on Microstrategy. This has recently been one of the cheaper stocks in the space, yet it also has one of the better product portfolios and market positions. Businesses are still spending big bucks on BI and MSTR should be a big beneficiary.
Performance: Since 3/31/05: +68.9%, Feb vs. Jan.: -4.6%
Comments: Traded off a bit this month after a very strong January and a slight miss on its Q4 report. Street numbers are still too low for this stock though and it has a decent product cycle coming up so I will continue to hold tight, but the stock is starting to approach the valuation levels of the other major players in the BI space.
Company: Actuate Ticker: ACTU
Sub-sector: Business Intelligence
Investment Thesis: Actuate is a business intelligence company with a particular focus on enterprise reporting. I had a long position in ACTU in 2004 and lost money on it, but I think the stock is back on the upswing now thanks to an improved product line and focus. ACTU trades at a healthy discount to rest of the BI group (kind of like SPSS did at one point) and every penny of upside in its EPS could really move the stock.
Performance: Since 9/30/05: +53.4% Feb. vs. Jan.: -4.0%
Comments: Traded off in February after a blistering January. Stock still has some life left because the street numbers are too low given a recent acquisition the company made.
Company: OpenText Ticker: OTEX
Sub-sector: Content Management
Investment Thesis: OpenText is a content management company that went on an acquisition binge in 2003 and 2004. The stock suffered from all the M&A related charges and fallout but management now claims that they are going to resolutely focus on EPS growth. OTEX trades at a healthy discount to the rest of the content management group and has a broad product portfolio. Integration snafus could trip them up, but the low multiple on the stock should limit any potential damage.
Performance: Since 9/30/05: +25.2% Feb. vs. Jan.: +5.6%
Comments: Nice month thanks to a decent Q4 report. The stock still trades at a big discount relative to the other content management names so there should be some upside remaining. Short interest is really starting to perk up on this stock though so I am watching it carefully.
Company: Cryptologic Ticker: CRYP
Sub-sector: Gaming Software
Investment Thesis: Cryptologic is a provider of gambling software to online casinos and poker rooms. They license their software to numerous companies in return for a cut of the take. About 70% of their revenues are from casino related software sales and about 30% from poker related sales. Since they are a technology provider and not an operator they actually are listed in the US and do not appear to be in danger of violating any online gambling laws.
Performance: Since 9/30/05: +43.8% Feb. vs. Jan.: +9.3%
Comments: A good Q4 report drove further gains in the stock. Now trading roughly in-line with the rest of the online gambling comps (around 12X 06 EPS). IPO of a competitor later this month may create a nice valuation gap though.
Company: Party Gaming Ticker: PRTY.L
Sub-sector: Online Gambling
Investment Thesis: Party gaming is the largest online gambling company in the world with a focus on poker, but a very quickly growing casino operation as well. Some may recall that I had PRTY long in a successful pair trade in Q4 05. After seeing Party's Q4 report and doing some modeling I feel compelled to add them into the portfolio as a pure long bet. Party not only showed good growth in poker in Q4, but had an absolute blow-out quarter in its casino business thanks to cross selling into its poker base. By my calculations the stock is currently trading at 11X 2006 EPS even though it should grow 30%-40% on the top/bottom line without adding any new businesses. Oh, and there's a 3% dividend payment coming in May.
Performance: Since 1/31/06: -4.7% Feb. vs. Jan.: -4.7%
Comments: Not a great first month in the portfolio, as concerns about online gambling legislation combined with a CEO change depressed the stock. Still looks like a good buy though given the continued momentum in the sector and their leadership.
Company: Agile Software Ticker: AGIL
Sub-sector: Supply Chain
Investment Thesis: The supply chain sector has been a complete disaster the last few years and Agile's stock has been no exception. However, AGIL has actually grown revenue over the last four years and while it's still GAAP negative it actually seems to have turned the corner in terms of generating positive operating cash flow. It's only trading at about 1.2X EV/Sales which is low given it's potential leverage once it gets its expense base in order.
Performance: Since 1/31/06: +7.9% Feb. vs. Jan.: +7.9%
Comments: Good first month in the portfolio thanks to a better than expected Q4 report. Supply Chain/PLM may indeed be coming back to life.
Company: Wave Systems Ticker: WAVX
Investment Thesis: I first encountered Wave when I wrote my initial analyst report on Wall Street in the mid-1990s. Wave has remained in business largely by claiming that it is developing revolutionary security technologies, kind of like a bio-tech company that never gets out of trials. With a grand total of $1.4M in revenues over the last 3.5 years, a $4M/quarter cash burn rate and only $4M or so in the bank, a day of reckoning is fast approaching.
Performance: Since 10/1/04: +28.7% Feb. vs. Jan.: +1.7%
Comments: As regular as clockwork, they dumped another 8.4M shares in mid-February to finance their slow sail into oblivion. It is stunning indictment of the SEC and NASDAQ that a company like this can continually sell fully registered common shares with no lock-up at huge discounts (24% discount to market and 19% at the money warrant coverage!) with no one taking legal or regulatory action. They are lucky they have no institutional holders because they'd sue to force a rights offering in a heartbeat. Instead, you have a cult-like group of retail investors who lap up the excess shares in the open market while a bunch of bucket-shop hedge funds laugh all the way to bank. Amazing. However, with 100M shares outstanding the scam is undoutedly getting a bit more difficult to pull off though. Delisting is scheduled for April (although it will undoubtedly be appealed), so I see no reason not to hold this position to its logical conclusion.
Company: Entrust Ticker: ENTU
Investment Thesis: Entrust started out providing Certificate Authority software for use in public key encryption and now has a broader line of identify management products. I know them from my days covering the security sector on Wall Street. They seem to disappoint at least once a year and given that the stock has now fully recovered from their last disappointment they should be due again. It doesn't help that most of the major software players, including IBM, Oracle and CA, have made their own identity management acquisitions in the past 18 months either.
Performance: Since 9/30/05: +33.9% Feb. vs. Jan.: +8.2%
Comments: It's hard to part ways with this stock, but with a 34% gain, likely support from continued buybacks and a much more realistic (but still too generous) 17X PE it's time to cover and move on. Thanks for the memories.
Company: Convera Ticker: CNVR
Sub-sector: Content Management
Investment Thesis: Some may recall that I was short Convera the first half of last year on the theory that the management team would not deliver on their much hyped enterprise web search product. That turned out to be a bad short as the hype around search was just too big of a reality distortion field. Well, reality has begun to settle in and I am back for another beating.
Performance: Since 1/31/06: -24.8% Jan. Vs. Dec.: -24.8%
Comments: Last month I said I was late to the party on this stock. Boy was I ever. Without CNVR, the overall portfolio would have been up 2% for the month. The crazy thing about this stock is that they pre-announced Q4 revenues would be down close to 50% y/y early in the month and the stock barely budged. When I saw that I got a sinking feeling in my stomach because it meant there were no sellers left at all. Sure enough, a few days later they put out a press release announcing 3 beta customers for their new web search product and the stock gapped up 30%. They also annouced a new $38M private placement which should come in handy given their prodigous burn rate. How can a company with $3M/quarter in revenues, a management team that has led it down successive dead ends, and $5M/quarter burn rate be worth $490M+? I don't know, but it is and it's kicking my ass for a second time.
Company: BankRate Ticker: RATE
Sub-sector: Internet Content
Investment Thesis: I spent a lot of time at one point in consulting to Fannie Mae and I spent a lot of time at one point analyzing financial services related internet companies. Bankrate is a web content site focused on financial services, but its growth is largely being driven by mortgage related advertising and referral fees. With interest rates rising, I don't think they will have trouble hitting their Q4 #s, but I can't imagine they aren't going to have to talk the analysts down a bit on off their pretty aggressive 06 growth #s.
Performance: Since 1/31/06: +4.9% Feb. vs. Jan.: +4.9%
Comments: Good first month which pretty much went as expected in that the stock seems to be trading in line with mortgage/housing sentiment which I expect to get worse over the next couple of months.
Internet Stock Update: February 2006
Internet stocks badly lagged the overall market in February with the Internet Stock Index down 5.0% vs. the NASDAQ's 1.1% decline. Amazingly, the average stock was actually up 7.4% due so some very strong performances from small caps, but weakness at many of the Internet's biggest names was too much for the overall sector to overcome. The big winner this month was Edgar Online which soared 125% on the backs of a good Q4 and improved earnings outlook while the big loser was Chinese wireless company Linktone whoose shares plunged 27.3% .
At a sector level, Information Services (-11.3%) was the worst performing sector thanks largely to weakness at sector leaders Google and Yahoo. Content Distribution (+33.2%) was the best performing sector thanks to good outlooks for both Akami and Loudeye.
There was one Internet related IPO in February, online auctioneer Liquidity Services and the only M&A deal completed was Liberty Media's acquisition of Provide Commerce.
For a detailed breakdown of all the stock statistics including a record of all of the M&A in the space, click here to download an Excel spreadsheet with the data and click here to get Microsoft's automatic stock quote downloading plug-in for Excel if you don't already have it. The spreadsheet has been improved lately with detailed fundamental financial data and ratios for almost all of the stocks.
Software Stock Update: February 2006
Software Stocks underperformed the rest of the market in February with the Software Stock Index down 2.4% vs. the NASDAQ's 1.1% decline. The average stock was up 1.2% thanks to a few crazy microcaps, but overall there were declines in small, mid, and large cap stocks. The best performing sector was Collaboration (+11.3%) while the worst performing sector was Clinical Apps (-9.6%).
There were, yet again, no software IPOs this month but two more software
acquisitions were closed with Intellisync going to Nokia, Micromuse going to IBM. We're just 2 months into 2006 and already 7 firms or 2.7% of the total have been acquired.
For a detailed breakdown of all the stock statistics including a record of all of the M&A in the space, click here to download an Excel spreadsheet with the data and click here to get Microsoft's automatic stock quote downloading plug-in for Excel if you don't already have it.