It's been just about five months now since we stopped by for a peek at our much beloved Internet Sucker's Index, the only Wall Street investment barometer specifically designed to track investor stupidity. So let us take a minute to catch up on the progress of the index, this time in light of what has turned out to be one of the biggest Internet sucker's bets since the creation of the index itself. We're speaking, of course, of theglobe.com ( TGLO), an essentially worthless business enterprise that has lost 65% of its value in the last five months, yet at its current price of barely 13 still remains grotesquely overvalued.
We'll get more deeply in a minute into theglobe.com quagmire, which features a blatantly false and misleading prospectus for a secondary stock offering this last May. We'll also look at an apparent 3 million-share bailout by the company's chairman as the stock price plunged. But first an update on the index itself. Actually, for much of this last year, the Internet Sucker's Index seemed to be making suckers out of us for having invented it in the first place. From a standing start in April 1998, when the market value of the 18 stocks in the index stood at $37.3 billion, the Izzy (that's our cute little Oscar-like way of referring to the index by its initials, OK?) ballooned in the following year into a 118-stock monster with a market capitalization of $404 billion. By this last April, Izzy equaled 17% of the market value of the Dow Jones Industrial Average. But since then, traders have begun -- as we like to say on Wall Street -- "taking their profits," and the index has begun a six-month-long slide that has by now carried its value back to $337 billion. That's a decline of 17%, even as the Dow industrials have risen 13%. Take a handful of the index's established, profitable companies out of the picture, and for the rest the carnage has been appalling. Junk stocks like uBid ( UBID), Cyberian Outpost ( COOL) and Egghead.com ( EGGS) have fallen by anywhere from 64% to 81% since the start of the year. And even big and presumably well-run outfits like Infoseek ( SEEK) are off by more than a third. But no stock in the index has made a more spectacular debut -- and thereafter proceeded to fall more audibly on its keister -- than theglobe.com. This New York-based Internet "portal" operation was started up by two kids from Cornell and taken public last November by Bear Stearns at 9 -- and has been a resounding disaster from day one. Now, we may not be the smartest folks around, but we're not the dumbest, either, and on that basis alone we may say that what went on in the November IPO for theglobe.com wasn't right. Nearly a year after the IPO, the Securities and Exchange Commission could still perform a useful public service by getting to the bottom of why the underwriters in the deal were willing to price theglobe.com's shares to their own institutional clients at 9 when demand from Internet daytraders would force the first trade in the aftermarket to an unbelievable 97. It was, of course, at that point -- with the public market valuing the shares at a markup of nearly 1,000% from what the insiders had paid -- that the institutions began dumping their shares, and the stock began a swan dive that has now carried it to around 13 (26 adjusted for a 2-for-1 split in late May). You just don't sell stock to insiders at 9 when you know they're going to turn right around and dump it on the public at 96 1/2 -- especially when you also know that on any accepted basis of stock valuation, the shares weren't worth even the 9 that the insiders were paying. But being practical-minded folks here at Eye to the Keyhole, we're willing to agree that what happened last November is now over and done with, and the question so far as theglobe.com is concerned should properly be framed as, "OK, so what have you done since then?" Sadly, the answer is, nothing. The company's entire business is built on the assumption that enough people will visit its site that the site will be attractive to advertisers, and that the revenue from those ads will cover the costs of running the business. That's the basic business model of the entire Internet, but it isn't working -- for theglobe.com or almost anyone else. When theglobe.com went public last November, its S-1 registration statement claimed 6.1 million "unique users" -- referring to individuals who visit the site once or more each month. During the six months from January to June of that year, those 6.1 million "unique users" had enabled the company to sell advertising worth $1.1 million, which is to say, each "unique user" was generating a ridiculous 18 cents of advertising. This is a business? In fact, it's more like a lemonade stand in cyberspace. What's more, it's the best the business ever got. If we vault forward to June 30 of this year, we find that theglobe.com's revenue has grown to $7.3 million for the trailing six-month period, whereas, if we look at the front cover of a secondary stock offering document, it turns out that, by March, the number of users of the site had grown to 10.2 million. We'll have more to say about the accuracy of that number in a minute, but assuming for the moment that it is more or less in the zone, it would appear that the company is now generating 73 cents of revenue per unique user. An accomplishment? Not hardly, since the company had to spend nearly $24 million during those six months to get it. In other words, to bring in 73 cents of ad revenue per unique user, the company had to spend $2.36 per user. Stated somewhat differently, in the first six months of 1998, the company lost 95 cents per unique user, whereas a year later it is now losing $1.63 per unique user. This is a business? Better to see it as an eight-lane superhighway to financial ruin. In fact, the situation is much worse even than that, since the foregoing calculation assumes that the company's user population has actually risen to at least 10.2 million since June 1998. But the truth is, it hasn't. The truth is, the 10.2 million number on the cover of the aforementioned secondary stock offering last May is way, way too high. It was derived, according to a footnote in the document, from data compiled by an Internet advertising firm, Doubleclick ( DCLK), which, shortly after the stock offering took place, informed theglobe.com's management that it had miscalculated the number and that the 10.2 million total was in error. theglobe.com thereupon issued a press release saying the number was in error but failing to disclose what the true number was. Why not? "We don't have a corrected number" is what a theglobe.com spokesman said before wandering into a pointless explanation of how I should really be looking at other non-Doubleclick-generated numbers, anyway. In fact, of course, if those were the numbers investors should have been looking at, then theglobe.com never should have put the Doubleclick figure on the cover page of its stock offering in the first place. In any case, when I asked Doubleclick to supply the corrected number, a spokesman there said it would do so only if someone from theglobe.com authorized the disclosure. When I called theglobe.com back and asked that it do that, the company's vice president of corporate development, Ed Cespedes, left no doubt as to how he felt about the matter. Said Mr. Cespedes, "That's dumb, and we're not going to do it." The fact is, of course, that if the Doubleclick number had erred on the low side, there would have been no reason to acknowledge the error. But how much of an error it represented on the high side is something that none of those involved now seem willing to say. Want to know why? A good place to start would be the Internet traffic numbers published monthly by Media Metrix ( MMXI), the acknowledged leader in the field. "We're one of the fastest-growing Web sites on the Net," said Mr. Cespedes. But according to Media Metrix's data, theglobe.com never had 6.1 million visitors in the first place, let alone 10.2 million now. According to Media Metrix's data, theglobe.com now has no more than 3.7 million unique visitors, placing it down around 43rd on the list of the agency's ranking of the top 50 Web sites -- a position from which it hasn't budged in months. theglobe.com bunch likes to argue that Media Metrix's numbers are wrong because they don't count college kids and overseas users of the Web. "There's a ridiculous amount of miscounting that goes on in the Internet space," said Mr. Cespedes. But if the numbers are ridiculous, then why did the company hype them on the cover of its May stock offering? And besides, if no one counts those college kids and non-U.S. Net users, how does theglobe.com know they're there at all -- and what difference does it make, anyway, if advertisers don't seem to be interested in finding out if they even exist? By claiming that all numbers except the highest possible ones are wrong, the company sounds like Spiro Agnew yakking about some silent majority. And by not correcting its own admitted error in the secondary stock offering, the company simply calls into question the accuracy of everything it says. It's worse even than that because, in the middle of the company's collapsing stock price, theglobe.com's main Daddy Warbucks, board chairman Michael Egan, decided, Aw, nuts to this ... and sold what an SEC Form 4 filing says was 3 million shares of his stock, or 25% of his entire stake, at 20 in late May. Mr. Cespedes said Mr. Egan actually sold "only" 2.5 million shares and that the Form 4 filing must be in error. Oh, another error. "We'll look into it," said Mr. Cespedes, who insisted that Mr. Egan regards theglobe.com as a terrific long-term investment -- which, of course, begs the question of why, if it's so great, he is selling 25% of his position. In fact, theglobe.com has convincingly shown itself to be an utterly dreadful investment, and the best hope its shareholders now have is that some other Internet outfit will come along and buy it. Something like that may be in the offing, too, since the company's share price in recent days has jumped over 30% on no noteworthy news at all. Of course, anyone buying the company in the belief that, at $95 per unique user, it is getting a bargain since comparable Internet basket cases like, say, iVillage ( IVIL), are selling for $163 per user, had better think twice. The bigger theglobe.com gets, the more money it loses, which is why the company had to come back to the Wall Street equity trough with a secondary stock offering a mere six months after its IPO. With cash operating losses now mounting at a rate of $6.9 million per quarter, the company has only 11 quarters of cash left before it runs out of money completely. Before then, either it -- or the unlucky company that buys it -- will have to step up to the plate with yet another stock offering, or a debt deal, or some combination of both. However you look at it, this company has trouble written all over it. theglobe.com's death will be as much of a spectacle as its birth, with investors throwing good money after bad in a business that has been a failure from the get-go. You can reach me by email at theglobe.com: Tell us what you think on
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