At internet.com, Nothing Ventured, Nothing Gained

BOSTON -- The way Alan Meckler sees it, he's the most judicious spender of promotional money on the Internet.

For Meckler, internet.com's (INTM Quote - Cramer on INTM - Stock Picks) chairman and CEO, it's a point of honor to claim that little of his company's growth comes from heavy advertising and promotional spending. internet.com, he said, will spend less than half a million dollars this year on promotion; the company reported revenue of $8.6 million in the first nine months.

Yet the company is growing, along with its highflying stock. After all, internet.com, like other companies, came to U.S. Bancorp Piper Jaffray's Internet Conference here telling a tale of growth -- and of positioning in the business-to-business area on the Internet, one that's striking investors' current fancy.

Just Wednesday, for instance, internet.com said it made venture-capital investments in three early-stage Internet content companies. Thursday the stock jumped some 40% to 49 1/2 on that news and a report that a deal with Yahoo! (YHOO Quote - Cramer on YHOO - Stock Picks) will allow its content to be distributed in Asia. Meckler also pointed to the company's rising profile with institutional investors following a miniroadshow last week, and the fact that it doesn't engage in a revenue-recognition practice that regulators have recently frowned on.

The company, which operates a steadily growing string of 78 Web sites targeted at Internet industry professionals, was spun out of Penton Media (PME Quote - Cramer on PME - Stock Picks) last year. Since coming public, it has seen page views jump to 80 million a month from 47 million in June, with 20% of the additional page views coming from internal growth and the rest from acquisitions.

internet.com uses unsold advertising space on its sites to promote its other sites. It also uses the industry conferences it operates. In a breakout session afterward, Meckler reduced his philosophy to what he called a Muhammad Ali-ism: "If you can't sell it on the site, it's not right." (Of course, as part of the deal creating internet.com -- the online properties of Mecklermedia, the Meckler-led company bought by Penton last year -- internet.com does get free advertising space in Penton print magazines.)

Furthermore, Meckler said that none of the company's revenue was barter revenue. (In bartering, a practice common on the Internet, Web sites claim as revenue the advertising they run on their site in exchange for ads they run on other sites.) "Barter revenue is fraudulent," Meckler said. "It's saying a page view they didn't sell that day could have value in the future. It doesn't."

Meckler isn't the only one concerned about barter. The Securities and Exchange Commission has asked the Financial Accounting Standards Board to look into several accounting issues at Internet companies, including counting barter as revenue.

But what investors like now about internet.com is its foray into Internet venture capital. Last week, the company said it raised $15 million for a venture fund as a follow-up to an earlier $5 million fund. And before the market opened Wednesday, internet.com announced the first three investments of the fund. Though this is a relatively small fund as these things go -- CMGI (CMGI Quote - Cramer on CMGI - Stock Picks), for example, has raised hundreds of millions of dollars for investing -- the news is making investors happy. Since its IPO at 14 in June, internet.com stock has more than tripled.

Judy Finger, a principal at internet.com shareholder Kern Capital Management, said she thinks the company is valued favorably to competitor VerticalNet (VERT Quote - Cramer on VERT - Stock Picks), which she doesn't own but calls a "great company."

VerticalNet revenue was about 25% greater than internet.com's in the year's first nine months, but it has a market cap more than four times that of internet.com. Finger doesn't think internet.com's venture portfolio has been factored into the stock price, and figures it's a good value even at higher levels.

But one buy-side analyst who listened to Meckler's presentation (but isn't a shareholder) wasn't so sure, saying he'd "look at it" if the stock price were under 20. Despite its growth and Meckler's target of 50% operating margins, "it's still an expensive stock." On the bright side, he said, "It sounds like it's a high-return-on-capital business. They don't really have to advertise." But, he added, not many businesses in the world can achieve 50% operating margins. "If they can, they'll invite a ton of competition."

Meckler himself has spent about $1 million buying internet.com stock since its IPO earlier this year, buying most of that at $13.50 per share and another block at $18.25 a share, he said.

But then, he's a judicious spender.