The Theory Economy

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In an ironic twist, the way the market values Internet companies runs contrary to the promise of the Web itself.

In an ironic twist, the way the market values Internet companies runs contrary to the promise of the Web itself. The Internet promised to customize information for individual users, but Wall Street analysts are hardly analyzing Internet companies individually. Rather, most are assuming that one Internet company is the same as the next.

James Whitehurst, a vice-president at the Boston Consulting Group, recently completed a study on how to value Internet companies. He concludes, among other points, that for now the whole process remains a conundrum. "It will be 25 years before we really understand whether the value one puts on a bookmark on Internet Explorer should be more than what one puts on the corner hardware store," says Whitehurst. "A year ago the market said that the bookmark was worth a ton, and today it says that the same company is worth almost nothing. And that pendulum will continue to swing."

Inevitably, when the theory market ricochets so wildly, companies like Fashionmall will get hammered along with every other company that has a similar business model. When every other online retailer and portal sinks with the weight of perceived carnage, then so too must Fashionmall sink.

Pegasus Research, an independent New York Citybased research firm, has come up with a list of 20 companies that, at press time, were trading at a significant discount to their cash on hand. Among them were dot-com players such as Mortgage.com, Quepasa.com, NetRadio.com, and Ventro Corp.

No matter. In order for Fashionmall to earn a stock price higher than its cash per share, it would have to cater to the prevailing theory on the street -- which is that both size and profits matter. Says analyst Skelly, "Scaling up is the only thing that would get investors excited." (That is, it's the only thing that Fashionmall could do on its own; the December takeover bids spurred a temporary increase in its stock price.)

But guess what? The only way to realize a big bump in visitor traffic would be to squander the cash that's keeping the company going. And so Fashionmall finds itself in stock-market cloud-cuckoo-land.

Prior to the takeover attempts, Narasin announced a stock-buyback program of up to 1 million of the 7.5 million outstanding shares. Not surprisingly, he saw a bargain in the cheap price. Now, with 46% of the common stock in hand, Narasin has the power to reject virtually any offer, though as CEO he has a fiduciary responsibility to consider an offer that puts a premium on the company. He hasn't seen such a bid yet.

With no fanfare and little venture money, the companies profiled here are delivering real stuff to paying customers and making a buck in the process. There may not be any "new rules," but there are rules, and we suspect every one of them will look familiar.

DVD Empire: The Bootstrapper
SitStay.com: The Mom-and-Pop
Shoebuy.com: The Scorekeepers
Accuship.com: The Traditionalist
Fashionmall.com: The Conservative
Healthcommunities.com: The Underwriter