Least Likely to Succeed: Reassessing the IPO Class of '99

Updated from 12:47 p.m. EDT

Imagine looking up your high-school classmates from two years ago only to find that most of them are in Sing Sing. That's an apt comparison when revisiting the IPO Class of '99 -- when all dot-com shops that went public were voted most likely to succeed and every speculative idea was popular enough to merit millions of dollars.

All in all, 485 companies went to market in 1999, according to research provided by Jay Ritter, initial public offerings expert at the University of Florida. Flash forward: More than 100 no longer exist in their original form. Many were delisted or tumbled into the obscurity of the over-the-counter market. Some such as Women.com were saved from the scrapheap by a rival such as iVillage (IVIL), while others, like eToys.com, snapped up the competition only to fail anyway. Then there's the NBCi-style bailout, in which a parent company brings the child back into the fold.

Of the 380-odd survivors, at least 58 are in danger of being delisted for having share prices of less than a dollar. Less than a quarter of the whole class is above their initial offering prices. More than half of the survivors are down 50% or more from when they started trading. From an investment perspective, the Class of '99 is a disaster. "I'm unaware of any time in capital market history where the slaughter was so wholesale," Ritter says.

Will anything survive? One sliver of the publicly traded online universe -- Web travel outfits -- has managed to rise from the ash heap. Let's examine why this group succeeded and see if any other tarnished dot-com prom queens from '99 can follow that template to success.

A Success Story

Consider the case of the online travel industry's Big Three -- Travelocity(TVLY) ('00), Expedia(EXPE) ('99) and priceline(PCLN) ('99). All three are profitable, posting huge stock gains so far this year after spending last year in the doghouse. Many investors missed out on the recent gains because of the stigma associated with the utter collapse of 1999's IPO class.

The trio's success doesn't surprise Thomas Weisel Partners online travel analyst Jake Fuller. "Travel is a perfect item to sell on the Web because it's a virtual product," he says. "There's no overhead and no warehouse, and the margin potential is there."

The online travel industry seems custom tailored for the Web, but does anything else have potential? On the surface, companies that sell information over the Web seem like good candidates for future success because, like travel agencies, they sell products that do not require inventory and have the potential for solid margins. Those who provide services also seem like a good fit because they, too, sell a virtual product. But those online retailers, a hallmark of 1999's IPO class, they've got work left to do.

• Online content -- While there are no warehouse or shipping issues, costs for office space and supplying a staff add up so quickly for online content providers that you might as well have the big barn. And with the collapse of the online advertising market, revenue streams are looking pretty dry. Salon Media (SALN) ('99) trades at 27 cents a share, off 97% from its IPO date. Nonetheless, a faint glimmer of hope has yet to die. According to Salon, about 12,000 users have signed up for subscriptions since April 25, netting $400,000. (TheStreet.com(TSCM), publisher of this Web site, came public at $19 in May 1999 and shot to $70 in its first day of trading. The stock now trades for about $1.30.)

• Content portals -- With a few notable exceptions, mostly early birds like AOL(AOL) ('92) and Yahoo!(YHOO) ('96), the online portal is dying an ugly death. In a slowdown, the model developed some fatal flaws. Ad sales slumped, while the cut gleaned from retail efforts couldn't keep a college kid stocked with ramen noodles. QuePasa.com ('99), a Spanish-language portal site, is a good example, currently trading at 11 cents a share after pricing at $12.

• Services -- A myriad of companies provide services online, but the question is always the same -- will users pay for the service? In the case of HotJobs.com(HOTJ) ('99), the answer is yes. "It's perfectly suited to the Internet. It takes out a lot of costs in hiring. It's lot quicker for job hunters," says Kathleen Heaney, consumer and new-media analyst at Brean Murray. She credits the subscription model's steady revenue stream as one of the main reasons HotJobs reached profitability in the just-announced second quarter -- ahead of schedule and despite slumping revenue. And the best is yet to come. "They haven't peaked in terms of revenue. They have a long way to go still," Heaney says. "This is where you make your money, by believing early." Make a note -- HotJobs is up 40% since its IPO.

The Black Eye

If there's one thing that the Class of 1999 will be remembered for, it's e-tailing, a high-profile black eye that millions mistakenly equate with investing in Internet companies. Can e-tailers overcome high costs, a tough time converting window-shoppers into buyers and still thick competition? Not really. Pure plays must spend millions building an infrastructure, then a brand, and finally, courting buyers. It's a tricky path that Amazon.com's(AMZN) ('97) investors are currently headed down. The pure-play winners will be smaller competitors, lurking in niches and choosing to keep it simple, avoiding the stupid moves of e-tailing's early days. Most everyone else who sells stuff over the Web will be linked to brick-and-mortar businesses, in the way that Bluelight.com is a branch of Kmart (KM).

1-800-Flowers.com (FLWS) is one example of a retailer that could make it out of the Class of 1999 alive. It is the only online retailer that Eric Beder, a senior vice president at Ladenburg Thalmann, will cover because the other ones "don't make sense." (1-800-Flowers is not a pure play. Beder is quick to point out that more than half of its revenue still comes from the 1-800 prefix, although the dot-com suffix is catching up.) The analyst expects the company to be EBITDA -positive -- earnings before interest, taxes, depreciation and amortization -- when it releases earnings in two weeks. That said, 1-800-Flowers.com is off 40% since its IPO, while rival FTD.com ('99) (EFTD) is off 13%. Nonetheless, the company has strong brand recognition and is the leader in its space.

Why is 1-800-Flowers successful? The same reason that Gap.com and others are doing so well -- because the infrastructure was in place, expectations were realistic and the service is there. That is a lesson many from the Class of 1999 have learned the hard way. As Beder says, "You can't make money just by putting your product out on the Web."

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