Egreetings' Hollow Victory

Off more than 30% from its IPO price, Egreetings finds out that, for an e-tailer, winning simply isn't good enough anymore.
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From a casual look at its business, one would think the message from online card purveyor

Egreetings Network

(EGRT)

would be cheerful. From its fourth-quarter earnings announcement, released Tuesday, sequential revenue is doubling, its audience is among the highest on the Web, the San Francisco company's partners are impressive and a chief competitor recently sold itself for nearly $800 million.

Then why are shares of tiny Egreetings, the prototypical Internet company that gives away its product for free, trading 30% below their December initial public offering price, giving the company a valuation of just over $200 million?

The answer is simple and provides a cautionary tale for the hundreds (thousands?) of other Web companies hoping to plug into a hot trend, attract sexy investors and lure top-flight investment bankers to underwrite their IPOs. With only a few exceptions, the consumer-focused phase of giddy Internet valuations is nearly over. One of the lessons learned is that young businesses without a realistic shot at making money may have further to fall -- in spite of their currently depressed valuations.

It's not as if Egreetings doesn't have juice. Investors include

Paul Allen's

Vulcan Ventures

, prominent venture capitalists

New Enterprise Associates

and

General Electric's

(GE) - Get Report

NBC

unit. Its single largest investor is

Gibson Greetings

(GIBG)

, which provides content to Egreetings.

Moreover, its growth is rapid. Fourth-quarter revenue of $1.6 million was double revenue in the previous quarter. And the 1.1 million average weekly visitors to its Web site during the four peak weeks of last year's holiday shopping season placed ninth out of the 10 most-visited shopping sites.

Despite the good news and several new initiatives and partnerships, however, shares of Egreetings closed Thursday at 6 7/8, down slightly since the release of the report and off more than 30% from their IPO price of 10. The company sold 6 million shares at the top end of its pre-offering filing range in a Dec. 15 IPO underwritten by tech-stock stars

Credit Suisse First Boston

.

At this level, Egreetings is valued at just $237 million. Never mind that

Excite@Home

(ATHM) - Get Report

agreed to buy competitor

Bluemountain.com

for $780 million in stock. Perversely, that deal, which theoretically should have boosted Egreetings' valuation, removed a major customer: Excite@Home accounted for 40% of Egreetings' sales for the first nine months of 1999, according to its IPO prospectus.

Another threat is the pending acquisition of Gibson Greetings by

American Greetings

(AM) - Get Report

. If that deal goes through, American Greetings will own 20% of Egreetings. That will make the old-line company want to help Egreetings, but then American Greetings also would be providing content to the competitor of its online subsidiary

Americangreetings.com

.

The bottom line here is that Egreetings simply is a very small and very unprofitable player in a consolidating market. Its $14.6 million loss in the fourth quarter puts its total accumulated deficit at $49.7 million. Moreover, consumer-oriented Internet companies just aren't "in" these days, Thursday's run-up of leader

Amazon.com

(AMZN) - Get Report

notwithstanding.

"The

consumer sector hasn't been the hottest," says Bob Hiler, Credit Suisse First Boston's analyst who follows Egreetings and rates it a buy. "I think Egreetings is being unfairly punished because of the sector rotation. It just makes the stock more attractive to investors at these levels."

Maybe. But the action has the look not of a rotation -- but of a migration. Also, it's not like a market frenzy has made Americangreetings.com move any faster. That company filed to go public in August but has stalled, having dismissed its CEO and chief financial officer while planning the IPO. The American Greetings dot-com unit illustrates the obstacles to success. Despite recording revenue of only $9.2 million (on which, to be fair, it earned 79% gross margins) in the first half of 1999, Americangreetings.com is saddled with commitments to pay

America Online

(AOL)

and

Yahoo!

(YHOO)

$108 million over the next five years. The dot-com will shell out another $24 million in royalties over three years to its parent, American Greetings.

For its part, Egreetings is already hip to the decline of the consumer sector. That's why it's moving into business-to-business activities. Through a two-year strategic partnership with privately held

TimeDance

announced last month, the two companies plan to offer "relationship management" tools to individual users and corporate customers. TimeDance provides online invitations and activity-planning services. These include RSVP tracking, interactive maps and scheduling tools, all of which will be available to Egreetings' customers.

Embracing B2B might put Egreetings back in the middle of the

zeitgeist

. But will it be enough?

Quote of the Week

"We've probably had losses up there with the best of them in the dot-com world."

-- John Connors, new chief financial officer of

Microsoft

(MSFT) - Get Report

, speaking at the

Banc of America Securities

technology conference about the performance of the

Microsoft Network

.

Sounds like he's getting the hang of it.

Adam Lashinsky's column appears Tuesdays, Wednesdays and Fridays. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Lashinsky writes a column for Fortune called the Wired Investor, and is a frequent commentator on public radio's Marketplace program. He welcomes your feedback at

alashinsky@thestreet.com.

Edie Yates assisted in the reporting of this column.