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Anyone nostalgic for the ill-fated tech-stock mania of five years ago need only fire up their favorite search engine and type in the word "
. That ruinously over-hyped company shows many of the unfortunate signs of firms that began to crash to earth in March 2000 -- and just a few of the positive marks of ones that survived.
When technology company shares peaked five years ago this month, after all, their future looked brighter than ever. Prices soared to highs because investors and traders, a great many of them new to the game, figured that the earnings potential of dot-com companies in the next year to five years would be even greater than they had been over the prior five years.
For most companies, an extrapolation of recent history to the far horizon turned out to be nonsense. But for a few, the hopefulness of March 2000 was not really so misplaced, as they had already shown they could be survivors amid cataclysmic change.
What separated the survivors from the shell-shocked? And why is Google likely to end up more like the late, lamented Exodus Communications than like
? And, sticking with the Es, why did a public utility like
turn out to be a better five-year investment than virtually all of the tech stocks?
The answers lie in at least two places.
First, companies that best survived the bursting of the tech-stock bubble were already, or on track to be, the most profitable -- signifying that their managers understood their role in the great capitalist value-creation chain. Technology futurist and newsletter publisher Mark Anderson explained his own skepticism of the many money-losing ventures back then by reminding readers that profits were nature's way of saying a company was a useful part of the ecosystem. At a time when business success for many pretenders was being measured in "clicks" and "eyeballs" rather than cold, hard cash, the comment seemed to some observers as hopelessly archaic. But in the end, Anderson was right: Companies that lasted were the ones that provided valuable, unique services that induced customers to pay a premium over competitors' services.
Online auction site eBay was a premier example. It fashioned a near-perfect Internet business model. It had virtually no cost of goods and little investment in infrastructure, required little management and, unique in the world of retail, had no concerns of the "turns" of its inventory. Its founder basically stumbled onto a model that was guaranteed to work as long as its network servers worked.
The hardest part of its business was attracting the first thousand sellers. After that, the viral effects of word-of-mouth marketing kicked in to attract thousands of buyers and sellers. Indeed, its customers morphed into a community that engendered remarkable loyalty, and buyers ultimately turned into vendors -- a truly unique phenomenon in the history of business.
In recent months, the community has turned hostile amid rapid fee increases. But there's no mistaking that this company has been a model survivor. Its shares initially fell as much as 65% from March 9, 2000, to a 2001 low. The stock, however, has been up as much as 90% from its price at the peak of the bubble, a rare feat among tech stocks. Despite a fallback this year, it's still up 35% from its 2000 peak.
Second, some survivors learned how to create perpetual revenue streams. Consider computer antivirus software maker
. At one time down as much as 65% from its March 9, 2000, price to a late 2000 low, Symantec quickly recovered and is now up more than any other major tech stock born in that era -- nearly 110%. Hammered recently over a decision to spend heavily on an acquisition, Symantec has nonetheless ridden the wave of threats to personal computers from viruses and spam to pile up unrelenting earnings growth quarter after quarter. Its pioneering business model focused on annuity-like revenue from subscriptions to self-improving software proved brilliant, highlighted by a capacity to regularly push through price increases.
both have to be considered survivors, in that their shares were each down more than 90% from their highs by late 2001 and have since recovered to declines of 50% and 65%, respectively. And their all-time returns are pretty similar, with each up roughly 2,400% from their initial-public-offering prices. Yet they took very different paths and remain on divergent tracks.
Anderson argues that Amazon founder Jeff Bezos turned out to be one of the best stock salesmen in finance history. In the late 1990s, he raised billions of dollars while he had the chance in stock and bond deals. He plowed the money into the sort of vast physical infrastructure -- distribution centers and inventory -- that eBay cleverly sidestepped. "Bezos understood there was only a certain amount of money available to companies like his, and that if he soaked up as much as possible, he would deprive potential competitors of funding," Anderson says.
Despite deep-seated frugality, Amazon nearly crashed before managing to squeak out its first cash-flow-positive quarter. Since then, it has survived by creating a first-class customer experience. Yet the company has a revolving door in management, has never managed to build a binding community and continues to face profitability challenges, as pricing pressure from online-retailing rivals intensifies.
Yahoo!, on the other hand, early on developed a laser-like focus on profitability and on developing the greatest variety of tools and content that people needed, wanted and actually used. The company's infrastructure is long on brains and silicon -- and far lighter on buildings and people. While eBay was the earliest profit king among the late-'90s-era tech stocks, with 87% gross margins and 24% net, Yahoo! has advanced since 2001 behind the strong leadership of Chief Executive Terry Semel to 73% gross margins and 23% net. (Amazon is at 26% gross and 5% net, while Symantec is at 87% gross and 22% net.) The keys to the Yahoo! model have been:
Its development of community through efforts ranging from Yahoo! Groups to Yahoo! Finance message boards.
Its rapid rollout of features that have become increasingly and almost invisibly embedded in its customers' daily habits. As page views and time spent have risen dramatically, so have ad revenue and ad market share.
Yahoo! is about to embark on what may be its most daring and dangerous venture -- the challenge of broadcast and cable television's hegemony on entertainment media -- but investors appear prepared to give management the benefit of the doubt that it can apply its low-cost, community-building expertise to this highly difficult realm.
Google's Strengths Are Its Fatal Flaw
So how does Google match up against these bubble survivors? Its greatest asset is its greatest weakness: Its engineers developed a world-beating search engine algorithm and Web interface, and its marketing team developed clever ways to monetize it through the sale of contextual text advertising. Its purity, however, has left it looking increasingly like a one-trick pony.
Search is not a particularly difficult computer engineering task, and while it may be popular, there is no community that compels users to habitually use Google search. In a nutshell, there are no barriers to entry. A couple of kids at a Shanghai university could come up with a better search method tomorrow, and tens of millions of users around the world could switch to it from Google in a week. "It's cool, but you can't defend it," Anderson says. "It is the most vulnerable high-capitalization company in the history of the world. Even in 2000, there was no company with more risk per dollar of market cap."
In contrast to the penny-pinching ethos at Amazon and relatively meager corporate spending at eBay and Yahoo!, Google has spent heavily on employees and headquarters. In perhaps the most hubristic move, the company provides such lavish meals for workers that a "Google lunch" is now a locution in Silicon Valley that means "over-the-top spending." In
this posting on its job boards, the company brags that free entrees include "grilled petite New York sirloins seasoned with Creole spices served with a Crescent City steak sauce and crispy organic onion rings." Soups include "sweet potato jalapeno bisque with corn," and dessert is "Bailey's Irish Cream cheesecake." Maybe no one told them that devs (a.k.a. programmers) do their best work on a diet of Doritos and Diet Coke.
Google's search growth is certainly slowing from its early torrid pace even as it adds photo and mapping site doodads, and competitors such as Yahoo! and
are ramping up their own efforts. The company isn't going to fall over, but at a tremendously optimistic current price of 16 times sales (compared with 12 times sales for Yahoo! and six times sales for Symantec), its risks at this point may outweigh its undeniable opportunities. In five years' time, a good way to search for information on Google might be "2005 dot-com bust."
And I have not forgotten about that reference to Exelon at the top. Despite all the excitement around technology in 2000, shares of many humble electricity suppliers have, like this Illinois utility, easily trumped their flashier dot-com customers, another manifestation of the trend I explained in
last week's column on the rise of suppliers over manufacturers.
Exelon shares are up 142% since March 9, 2000, with industry-leading gross margins of 42% and net margins of 13%. And one imagines they don't serve their linemen and nuclear power plant operators free bisque with their biscuits.
At the time of publication, Markman held positions in Symantec.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at firstname.lastname@example.org; put COMMENT in the subject line.