Notice how talk has died down about the three tiers of stocks, the Old Economy, New Economy and New Old Economy? That's because all the Economies are getting creamed. So, it's time for a new three-tier cosmology, this one within the tech sector itself.
At the top are the best of the techs, like
. These companies are clearly survivors. They are solid leaders in their market and remain key holdings in many portfolios even after other tech investments have been pruned. The only questions about them is their ability to sustain high growth rates and whether their valuations are still too lofty.
At the bottom of this layer cake are the companies that never should have gone public, aren't ever going to earn money and should be avoided by investors at any price. There's no need to be nasty here by naming all the losers. Think
( KOOP) and any other dot-com company that raised money in public markets with little more than a concept and a business plan that involved blowing that IPO loot in one massive marketing push.
That leaves the middle as the place to look for stocks with breakout potential. This group is comprised of young technology and dot-com companies whose shares have been slaughtered, but which for one reason or another have a shot at making money for investors one day. For these companies, the initial promise of the Internet remains valid.
In general, these are companies that can supply vital "enabling" technology to the Net or, on the e-commerce side, have figured out how to create value through new services that can only be delivered on the Net. Selling pet supplies online, it turns out, does not qualify. Nor do business plans that presume a never-ending supply of investors willing to indulge massive upfront losses.
How to separate the winners from the losers in the middle? A key factor is cash: A company may have created a viable business on the Net, but does it have the cash to keep it going until it can sustain itself with current revenue? When losing gobs of money was OK -- three months ago -- these questions could go unanswered. Now they can't.
Jamie Friedman, who follows business-software companies for
in Menlo Park, Calif., calls this second tier the companies that were the "first
mover," a distinction far more important than the vaunted first-mover advantage that dot-com execs used to say was the key to success. Like
the first online bookseller, companies that beat the competition to market retained a distinct advantage. Friedman's job has been lonely as his favorites like
( FMKT) (a Goldman client) and
( CMRC) have been pounded.
His best example of my second tier is
, whose shares closed Wednesday at 9 1/8, a new low compared with a high of 98 1/2. (Goldman was lead manager of a five-million share secondary for Stamps.com in December at 65. Ouch for clients; hurrah for Stamps.com.) The market seemingly has given up on Stamps.com, which enables Web-based metering of postage.
With just $2 million in first-quarter revenue (and negative gross margins), Stamps.com managed to rack up an operating loss of $42 million. And yet it sat on a cash hoard of $368 million on March 31. Friedman, who rates Stamps.com a trading buy, paints the company's future in simple and optimistic terms. If the annual market for postage is $50 billion and if eventually 10% goes online and if Stamps.com can get a 25% marketshare, the company could rack up revenue of $1.25 billion.
"A little bit of a lot is a lot," says Friedman.
That's also a lot of ifs, but the kind of ifs that can lead an investor to a decision that this company will be something one day. Now repeat that for the slaughtered techs in your portfolio: Tier 2s stay; Tier 3s go.
Wrongly Heeding the Lockup Expiration Bogeyman?
It's pretty darn tough to work up a lot of sympathy for a dot-com executive whose firm is losing money hand over fist but who feels his downtrodden stock is being unfairly victimized. But it's at least interesting when the CEO's beef has some merit.
The exec I have in mind is Srivats Sampath, CEO of security software company
( MCAF). He is bugged because Wall Street is atwitter about the 38.5 million shares of his company (88% of the outstanding shares) that are due to become unlocked on May 29. This means that investors who have had restrictions on their trading activity (typically insiders and venture-capital investors) are freed up to dump their stock. When lockups are set to expire, as my colleague
documents weekly in his column
Upcoming Lockup Expirations, stocks often trade down on the logical assumption that a sudden deluge of supply will depress the stock price.
But, Sampath says, McAfee's lockup expiration won't produce such a glut on the market. "Since we're not a VC-funded company, there will be no distribution," he says. Software maker
( NETA), which spun out McAfee.com in an IPO last December, still owns about 82% of McAfee.com's shares. Sampath says Network Associates is unlikely to sell, because it would lose the tax credits from McAfee.com's losses if its ownership falls below 80%. Of the 2.5 million shares that will be unlocked that Network Associates doesn't own, five honchos including Sampath control all but 700,000 shares. He says he and his management team won't sell any shares this quarter, in part because McAfee.com employees don't begin vesting until July 1.
In the long run, lockup expirations are meaningless, but they're of great interest to short-term investors. What's more, it's impossible to say if McAfee.com's shares are down because of the expiration or because it lost $8 million in the first quarter alone on revenue of $10 million. But barring a tax-free spinoff of McAfee.com shares by Network Associates, the available shares of McAfee.com aren't about to increase dramatically any time soon.
Thanks to the reader for taking me to task recently for an unintentional vulgarism in my column. Writing to praise a recent piece on Yahoo!'s plans for future products, she writes: "But would you please drop the phrase 'opened the kimono' from your lexicon? Guys use this phrase without stopping to think that it's extremely sexist, deriving from the highly exploitative world of geishas."
Hmm. Frankly, I hadn't considered that. The phrase in question clearly refers to revealing something that's desirable and heretofore had been covered up, and therefore has sexual overtones. It became popularized as business jargon in the 1980s when the business world still marveled at the Japanese "miracle."
There are most certainly male equivalents, one being the cheeky "lifting the kilt," wittily defined by
as "showing what you've got underneath." But perhaps something more benign, like "raising the flap of the tent," would be more appropriate for a family-oriented publication like
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