Portals, Small-Caps and IPOs

I've been musing about three emerging trends in the technology arena. They are:

Portals

I wonder if the portals' rush to sell out is an indication that their business ain't what it used to be. I wonder if these guys are all looking in their pipeline and not liking what they see.

Excite (XCIT) was all too happy to sell out to @Home (ATHM). Lycos (LCOS) practically gave itself away to Barry Diller, and CMG Information Services (CMGI), which doesn't like the price on the deal, is begging others to buy Lycos. Infoseek (SEEK) long ago gave up control to Disney (DIS). Yahoo! (YHOO) is independent but acquiring GeoCities (GCTY) and perhaps broadcast.com (BCST) in an effort to expand beyond the straight portal model.

There appears to be a growing realization that traffic originates on transaction sites, rather than being fed there. I just got off the phone with a guy who drives that point home. He sells stuff on eBay (EBAY) and has stopped buying banner ads on Yahoo! and Excite. He's found he's able to generate more traffic just by providing a click-through to his Web site from his eBay item descriptions.

Small-Caps

The spread between small-cap technology and large-cap technology continues to stretch. Money has been flowing out of small-cap funds, forcing selling, and small-cap tech now means value, while large-cap tech means growth.

Of course, this is a growth market, not a value market, so the more small-cap gets sold, the greater the flows out of the sector, making it a vicious circle. I was at a road show presentation last week for a secondary offering of a company that had a $500 million valuation. I half-kiddingly told the presenters that all they really needed to do was get their stock to double, and then their shares could really soar. That is, if their company sported a $1 billion valuation, then a huge set of mid-cap and large-cap funds could buy it, and it would go up every day.

IPO Pipeline

The IPO pipeline is chock full of Internet goodies, but instead of the one-of-a-kind offerings that characterized previous filings, the new entrants represent the second, third or fifth company in each category. This realization came home to roost this week as both Autoweb (AWEB:Nasdaq) and Autobytel (ABTL:Nasdaq) are being priced, while car.com can't be far behind.

In 1984, the market choked on the 30th disk drive company, and in 1991, too many biotech companies had the same effect. So it is worth thinking about whether some sub-sectors of the Web are becoming overcapitalized. I know of six email providers that have either filed or will soon. iVillage (IVIL) will soon be joined by women.com and later Oxygen Media. Great sectors, great companies, but do we really need all of them?

My own calculations suggest that, based on current projections for future revenues just for companies now in the IPO pipeline, the average American visits 437 Internet sites per minute and buys well over the GDP of Liechtenstein online per day. We have clearly hit the point where too many sites need traffic. Be very cautious of entirely ad-supported sites -- the mini-portals -- because both their numbers and their prospects are in flux.

Even more disconcerting, I have always noticed that, whenever the IPO pipeline is at its fullest, the market for tech stocks always weakens. It's not clear whether this is due to stretched valuations that open the IPO window to lesser quality companies, or, because funds are selling older stocks and buying new ones that are fresh IPOs -- or whether it is just a recognition that money flows into growth funds have peaked. Whatever -- the relationship certainly exists.

Capital Letters

Finally, as a sub-note, do you find it as annoying as I do to have to remember whether to capitalize company names, as in eBay, broadcast.com, iVillage and so on? Cisco (CSCO) used to be officially known as cisco, until its corporate lawyers got so annoyed at having to explain to banks that the company was indeed the capped "Cisco" printed on checks from customers. Finally, in frustration, they officially changed the name to Cisco with a capital C.

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