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Web Stock Universe Cash Flow Study (2000-2003)
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July 22, 2003
The bursting of the dot com bubble, the eroding credibility and the ensuing investigations of Wall Street analysts and equities research methodologies or practices has left a void in the area of web stock research.
StockDiagnostics.com Inc., an independent provider of equities research on over 10,000 public companies, has made an ongoing commitment to conduct ongoing research on publicly traded web companies. The company recently concluded a cash flow study entitled "Web Stock UniverseTM" on 691 publicly traded web companies. Each of the web companies filed financial statements for at least one complete year and had shares trade during the three-year period beginning January 1, 2000 and ending December 31, 2002. The following is a listing of the industries and the number of companies from each web industry that were included in the study:
| Industries |
Members |
| On-line Information Providers: |
84 |
| On-line Retailers: |
53 |
| Internet Telephone: |
9 |
| On-line Financial Information Providers: |
21 |
| Large Cap Internet Software & Services: |
155 |
| Mid Cap Internet Software & Services: |
156 |
| Small Cap Internet Software & Services: |
152 |
| Security Software Services: |
51 |
| Misc. On-line: |
10* |
*Misc. includes on-line advertising, research services and travel companies, including Rooms.com and Expedia which recently announced they were being acquired by InterActive Corp.
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Printable Version
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Study Parameters
The first part of the in-depth study determined how many web companies went out of business and how many had remained in business as of March 31, 2003. The second part
of the study examined operating cash flow consistency for all web companies. The third part of the study determined the viability of StockDiagnostics.com's OPS Rankings as a web stock research and performance metric. The fourth part of the study focused on web company acquisitions and what role cash flow and OPS Rankings played in them. The final part of the study was to examine the operating cash flow consistency and growth rates of all web industries and where they ranked amongst all Industries that are monitored by StockDiagnostics.com.
Preliminary Findings
StockDiagnostics.com regularly monitors ongoing OPS (operational cash flow per share) or cash flow for over 7,000 non-financial public companies (691 web companies) and 245 Industries (8 web industries). Prior to its commencement of this in-depth research study StockDiagnostics.com had been conducting preliminary cash flow or OPS analysis of certain web companies such as Amazon, Yahoo, Overture, United Online and Digital River. Cash flow metrics have become especially important for web company valuations since many of them have not yet generated significant earnings or EPS.
In tracking the cash flow metrics and the valuations of web companies StockDiagnostics.com discovered that positive to negative and vice versa changes in OPS (operational cash flow per share) and OPS Ranking upgrades and downgrades signaled significant changes in share prices since 2000. For example, Yahoo (NASDAQ:YHOO) shares appreciated 179.25% as of August 14, 2002 after its quarterly OPS changed from negative to positive and its OPS Ranking was upgraded to StockDiagnostics.com's highest. Amazon's (NASDAQ:AMZN) shares appreciated by 95.58% as of Octoner 29, 2002 after its annualized OPS changed from negative to positive for the first time in four years and its OPS Ranking also went to its highest in four years. On the other hand, Overture's (NASDAQ:OVER) OPS Ranking was downgraded after its quarterly OPS changed from positive to negative and its shares declined by 16% as of August 27, 2002. After generating negative quarterly cash flow or OPS from inception the OPS for BankRate, Inc., (NASDAQ:RATE) and United Online (NASDAQ:UNTD) changed to positive while the EPS remained negative. After both companies went on to report their second consecutive quarter of positive cash flow, for the first time in their respective histories, the shares of both United Online and Bankrate appreciated by over 100%.
These preliminary findings on web companies showing a high correlation of share price to OPS positive and negative momentum changes and the resulting OPS Rankings upgrades and downgrades was the catalyst for StockDiagnostics.com's in-depth Web Stock Universe cash flow research study.
About OPS & OPS Rankings
OPS was discovered by StockDiagnostics.com after it conducted an autopsy on Enron's Cash Flow From Operations in late 2001. "OPS Rankings" were the natural outcome of extensive research conducted by StockDiagnostics.com on Cash Flow From Operations and OPS (Operational-cashflow Per Share). The eight point "1" through "8" OPS Ranking system emanated from a statistical research study ("The 1999 OPS Study") that was conducted by StockDiagnostics.com on the Cash Flow from Operations of 3,885 non-financial public companies for Calendar Year 1999. To qualify for the 1999 OPS Study each of the 3,885 companies had to have filed four quarters of financial statements during 1999 and had to have traded at a price above $6 per share during 1999. Based on their respective quarterly and annualized cash flow consistencies or inconsistencies each of the 3,885 public companies in the 1999 OPS study were assigned to one of 8 different control groups (hence the 1-8 OPS Rankings scale). The share prices of the 3,885 companies were then analyzed for calendar year 2001 to determine whether OPS or Cash Flow from Operations was a predictor of a company's viability and share price stability. The Table below illustrates the results of the 1999 OPS Study:
1999 OPS Study Statistics
| OPS Study Control Groups 1-8 |
Companies trading above $6 in 1999 |
Companies trading above $6 in 2001 |
% of 1999 Companies trading above $6 |
Control Groups 1-8 (assigned OPS Rankings 1-8) |
OPS (1999)
4 Quarters |
OPS (1999)
Annualized |
4 pos,
0 neg |
Positive |
1261 |
1156 |
91.67% |
1 |
3 pos,
1 neg |
Positive |
893 |
731 |
81.86% |
2 |
2 pos,
2 neg |
Positive |
491 |
359 |
73.12% |
3 |
1 pos,
3 neg |
Positive |
79 |
56 |
70.89% |
4 |
3 pos,
1 neg |
Negative |
38 |
22 |
57.89% |
5 |
2 pos,
2 neg |
Negative |
226 |
121 |
53.54% |
6 |
1 pos,
3 neg |
Negative |
366 |
192 |
52.46% |
7 |
0 pos,
4 neg |
Negative |
531 |
248 |
46.70% |
8 |
Findings from the 1999 OPS Study concluded that OPS or Cash Flow from Operations was a good predictor in the stability of a company's future share price performance. The Study concluded that those with the worst performing shares and having the highest incidence of going out of business out of the eight control groups was the group which generated four consecutive quarters of negative cash flow and negative annualized cash flow (OPS) for calendar 1999. On the other hand the companies with the best performing shares and having the highest incidence of remaining in business out of the eight control groups was the group which generated four consecutive quarters of positive cash flow (OPS) and also had positive annualized cash flow. The findings of a high correlation between consistently negative cash flow (OPS) and business failure in the "Web Stock Universe Study" support the conclusions from the original 1999 OPS Study.
Web Study Findings:
Survival Statistics
- Web Companies out of Business
The findings concluded that 35% or 243 of the 691 publicly traded web companies are inactive or are out of business. Of the 243 inactive companies, five percent or 13 of them became inactive in 2000; 34% or 82 of them became inactive in 2001 and 53% or 128 of them became inactive in 2002. Complete historical quarterly cash flow data and OPS Ranking data was available for only 235 of the 243 inactive or out of business web companies.
- Web companies with their most recent cash flow being negative had a high mortality rate
The study concluded that 82% or 193 of the 235 web companies that went out of business had negative annualized cash flow from operations or had negative OPS Rankings (5 through 8) assigned by StockDiagnostics.com for their last four quarters or 12 months before they became inactive.
- Web companies that never generated positive annualized Cash Flow from Operations also had a high mortality rate
Further findings concluded that 84% or 198 out of the 235 inactive or out of business web companies never generated positive annualized operating cash flow or had a positive OPS Ranking (1 through 4) assigned by StockDiagnostics.com for any quarterly ending period during the three years (13 quarters).
- Many web companies going out of business did not generate a single quarter of positive OPS or Cash Flow from Operations
A significant number of companies going out of business did not report even a single quarter of positive OPS during the entire three-year (13 quarter) period. Findings concluded that 51% or 120 of the 235 companies that are inactive or went out of business did not generate positive cash flow for even one quarter or were ever assigned an OPS Ranking higher than StockDiagnostics.com's lowest OPS Ranking of "8" for any quarterly ending period during the three years (13 quarters).
- Web companies with a high incidence of positive annualized OPS or Cash Flow from Operations for their most recent 12 months have a 99% survival rate
Web companies with a high incidence of positive annualized OPS or cash Flow From Operations have a high survival rate. The study concluded that only two or 1% of the 243 web companies that are inactive or went out of business had positive annualized cash flow from operations or had positive OPS Rankings (1 through 4) assigned by StockDiagnostics.com for their last reported four quarters or 12 months.
Further findings concluded that only 17% or 42 of the inactive or out of business web companies generated positive annualized operating cash flow or had a positive OPS Ranking (1 through 4) assigned by StockDiagnostics.com for at least one quarterly ending period during the three years (13 quarters).
- Web companies generating positive annualized OPS or Cash Flow have Increased by 153%
Web companies were meteorically overvalued in 2000 as only 13.8% of them (96/691) generated positive annualized cash flow. For the first quarter ending March of 2003, the number of web companies that were able to generate positive annualized cash flow or were assigned a positive OPS Ranking (1 through 4) by StockDiagnostics.com for at least one quarter during 2000 to 2003, increased by 153% to 243 out the 691 total.
| Year |
No. Companies with at least one quarter of annualized positive cash flow 2000-2003 |
Percentage of 691 total companies |
| 2000 (4 Quarters) |
96 |
13.8% |
| 2001 (4 Quarters) |
164 |
23.7% |
| 2002 (4 Quarters) |
233 |
33.7% |
| 2003 (1 Quarter) |
243 |
35.1% |
Cash Flow is Key to Longevity
- Emerging Cash Flow Key to Web Company Longevity
Of the web companies reporting at least one quarter of positive cash flow encompassing the period of the study (2000-2003), 181 of them, a clear majority (74%) have been able to maintain positive OPS or annualized cash flow as of the first quarter ended March 31, 2003.
- OPS and Cash Flow consistency is also improving for Web companies
Web companies producing at least one string of four consecutive quarters of positive cash flow during the 13 quarter time period increased by 177% from 35 in 2000 to 97 at the end of the first quarter of 2003.
The number of web companies which were able to generate at least four consecutive positive quarters of OPS or Cash Flow From Operations and were also assigned StockDiagnostics.com's highest OPS Ranking of "1" during the 13 quarters is up from 35 in 2000 to 97 at March 31, 2003, a 166% increase. Companies joining this group in their most recent quarter include Avenue A, Inc (NASDAQ:AQNT), Digital Insight Corp (NASDAQ:DGIN), Digital Impact, Inc. (NASDAQ:DIGI), MarketWatch.com, Inc. (NASDAQ:MKTW), Macromedia, Inc.(NASDAQ: MACR), and AsiaInfo Holdings, Inc. (NASDAQ:ASIA). Additionally, 12 more web companies generated their third consecutive quarter of positive cash flow from operations or OPS in their most recent quarter. These 12 companies including Autobytel.com (NASDAQ:ABTL) and Infospace (NASDAQ:INSP) are positioned to generate their fourth consecutive quarter of positive cash flow from operations or OPS in their current quarters.
| Year |
No. Web Companies with 4 consecutive
quarters of positive cash flow 2000-2003 |
| 2000 (4 Quarters) |
35 |
| 2001 (4 Quarters) |
59 |
| 2002 (4 Quarters) |
92 |
| 2003 (1 Quarter) |
97 |
OPS is a Solid Predictor
- Web companies with positive OPS have more consistent revenue growth
Web companies that are currently producing positive annualized cash flow are demonstrating better revenue growth consistency. StockDiagnostics.com found that 74% or 87 of the 117 active web companies with positive annualized OPS and OPS Rankings of 1 through 4 for their most recent quarter also reported revenue growth for their most recent quarter. Conversely, only 53% or 136 of those web 258 web companies with negative annualized OPS or being assigned negative OPS Rankings of 5 through 8 for their most recent quarter were able to increase revenue in their most recent quarter. The top five fastest revenue growth web companies that have annualized positive OPS and a positive OPS Ranking of 1 through 4 in their most recent quarter:
| Rank |
Company |
Revenue Growth |
| 1 |
Epixtar Corporation (EPXR) |
498% |
| 2 |
Youbet.com, Inc. (UBET) |
320% |
| 3 |
Sohu.com, Inc. (SOHU) |
218% |
| 4 |
YP.net, Inc. (YPNT) |
141% |
| 5 |
SafeNet, Inc. (SFNT) |
128% |
- OPS is better at predicting significant share price increases than EPS
Dozens of other web companies have gone from being totally OPS negative to OPS positive since 2000. Many of them including United Online (NASDAQ:UNTD), WebMD (NASDAQ:HLTH), FindWhat.com (NASDAQ:FWHT), Expedia (NASDAQ:EXPE)) and J2 Global Communications (NASDAQ:JCOM) have been the stock market's leaders.
What many of these leaders including Yahoo, United Online, Expedia and J2 Global Communications had in common is that their share prices began strong advances after they each generated two consecutive positive OPS quarters while their string of negative EPS quarters continued. The two positive OPS quarters were preceded by long consecutive strings of negative OPS and StockDiagnostics.com's lowest OPS Ranking of "8". Each of them also began consecutive strings of positive EPS after they had generated consecutive quarters of positive OPS and their share prices had already climbed significantly.
- Web companies able to maintain StockDiagnostics.com's highest OPS Ranking of "1"is growing
The number of web companies that have been able to attain and maintain StockDiagnostics.com's highest OPS Ranking of "1" has been steadily growing by over 100% per year. Web companies attaining and maintaining StockDiagnostics.com's highest OPS Ranking (1) have grown from 10 in 2000 to 51 companies at March 31, 2003, a 410% increase. Among the 35 which have been able to maintain the highest OPS Ranking of "1" (12 consecutive positive quarters) since 2000, include EBAY (NASDAQ:EBAY), Symnatec Corp (NASDAQ:SYMC), FactSet Research Systems (NYSE:FDS: ), Internet Security Systems, Inc. (NASDAQ:ISSX), Verisign Inc.(NASDAQ:VRSN) and One Source Information Services, Inc.(NASDAQ:ONES).
| Year |
No. Web Companies maintaining StockDiagnostics.com's
highest OPS Ranking 2000-2002 |
| 2000 |
10 |
| 2001 (4 Quarters) |
20 |
| 2002 (4 Quarters) |
51 |
- Web companies able to maintain a positive OPS Ranking (1 - 4) is growing
Web companies that have been able to attain and maintain a positive OPS Ranking (1 through 4) by StockDiagnostics.com has also been increasing at a rate of over 100% per year. Web companies attaining and maintaining positive OPS Rankings (1 through 4) have grown from 25 in 2000 to 124 companies at March 31, 2003, a 396% increase. Yahoo (NASDAQ:YHOO) and Register.com, Inc. (NASDAQ:RCOM) are among those web companies that have maintained positive OPS Rankings for 12 consecutive quarters.
| Year |
No. Web Companies maintaining positive OPS Ranking 2000-2002 |
| 2000 |
25 |
| 2001 |
58 |
| 2002 |
124 |
- Web companies in their last 4 quarters that have been assigned positive OPS Rankings for the first time is growing
The number of web companies that have been able to attain positive OPS Rankings (1 through 4) for the first time in each year is increasing. Web companies being assigned a positive OPS Ranking (1 through 4) by StockDiagnostics.com for the first time ever has grown from 97 in 2000 to 172 companies at December 31, 2002, a 77% increase. Web companies that have achieved positive annualized cash flow from operations or OPS and positive OPS Rankings in their most recent four quarters include WebMd, Corp (NASDAQ:HLTH), Stamps.com, Inc. (NASDAQ:STMP), SupportSoft, Inc. (NASDAQ:SPRT), NetFlix, Inc. (NASDAQ: NFLX) and Look Smart, Ltd (NASDAQ:LOOK).
| Year |
No. Web Companies attaining positive OPS Ranking
for the first time in the last 4 quarters 2000-2002 |
| 2000 |
97 |
| 2001 |
136 |
| 2002 |
172 |
- Web companies at OPS Ranking highs are increasing and at OPS Ranking lows are decreasing
The number of web companies at three year OPS Ranking highs is increasing and the number at three year lows is decreasing. A total of 57 web companies have hit three year OPS Ranking highs within their last four quarters while only 16 hit new OPS Ranking lows over the same period. Companies at three year high OPS Rankings include Amazon (NASDAQ:AMZN) and Ask Jeeves. (NASDAQ:ASKJ). Real Networks, Inc (NASDAQ:RNWK) and NetRatings (NASDAQ:NTRT) hit three year lows within their last four quarters.
- Web companies with the lowest OPS Ranking (8) are steadily declining
The number of web companies that have never been assigned an OPS Ranking above StockDiagnostics.com's lowest OPS Ranking of "8" is declining. Over the past four quarters 39 web companies out of a possible 260 have seen their rankings improve to at least a "7", StockDiagnostics.com's second lowest OPS Ranking. The number of companies that have been unable to get above StockDiagnostics.com's lowest OPS Ranking of "8", in their last 13 consecutive quarters has steadily declined from 288 in 2000 to 162 at March 31, 2003, a 44% decrease. Some of the better known web companies with OPS Rankings of "8" for their past 13 quarters include AKAMI Technologies (NASDAQ:AKAM), Neoforma (NASDAQ:NEOF) and Drugstore.com (NASDAQ :DSCM).
| Year |
No. Web Companies with the lowest OPS Ranking
of "8" for four consecutive quarters |
| 2000 |
288 |
| 2001 |
232 |
| 2002 |
162 |
Web Company Acquisitions
- Web company acquisitions are skyrocketing
A total of 33 web companies were acquired during the period beginning January 1, 2000 and ending March 31, 2003. Not surprisingly, at the height of the 2000 through 2001 dot com bubble, only four companies were acquired each for less than $1 per share. During 2002, merger and acquisition activity picked up with 16 web companies being bought out including McAfee.com which was bought out by Network Associates (NYSE:NET) and TicketMaster which was bought out by InterActive Corp (NASDAQ:ICAI).
It looks as though 2003 will be a record year for the number of web acquisitions. For the fist quarter ended March 31, 2003, a total of 13 web companies were bought out including Expedia (NASDAQ:EXPE) and Rooms.com (NASDAQ:ROOM) which were both bought out at all time high share prices. Based on web company merger and acquisition activity in the first quarter of 2003 it is quite possible that 50 or more web companies could be bought out in 2003.
The aggregate amount of capital being spent for web company acquisitions has skyrocketed. For 2002, the aggregate amount of capital was $2.7 billion, or 80 times more than 2000 and 2001's paltry merger and acquisition activity combined. In the first quarter of 2003, the capital committed to web mergers and acquisitions shattered the previous record set for all of 2002 by 123%.
| Year |
Total No. of Web Companies Acquired |
Aggregate Amount of Acquisitions |
| 2000 (4 Quarters) |
2 |
$1,142,040.23 |
| 2001 (4 Quarters) |
2 |
$30,732,032.43 |
| 2002 (4 Quarters) |
16 |
$2,695,775,292.98 |
| 2003 (1 Quarter) |
13 |
$5,990,254,803.78 |
- Web company acquisition valuations are based on Cash flow
The operating cash flow was examined for the 33 web companies which were acquired. Findings indicated that 12 of them or 36% of the companies generated annualized positive cash flow for at least one 12 month period during the 13 quarter time period beginning January 2000 and ending March 31, 2002. Conversely, 21 or 64% of the acquired companies failed to generate positive annualized cash flow during the 13 quarter period.
Whether the acquisition target's cash flow was positive or negative also had a significant impact on acquisition share price. Only two of the 12 companies generating positive annualized cash flow were acquired at prices of less than $2 per share. On the other hand only one of the 21 companies, which never generated positive annualized cash flow was bought for a price in excess of $2 per share. That company was Vicinity Corp, which was bought by Microsoft (NASDAQ:MSFT) in 2002.
- Web companies with high OPS Rankings are acquired at a premium
The OPS Rankings were examined for all 33 of the web companies which were acquired. The 12 web companies with a history of positive cash flow had StockDiagnostics.com's highest or second highest OPS Ranking at the time of the acquisitions. Of the remaining 21 companies, 16 of them had never received an OPS Ranking higher than StockDiagnostics.com's lowest OPS Ranking of "8". Two of the five remaining web companies never got above the second lowest OPS Ranking of "7" and the final two never got an OPS Ranking above "6", StockDiagnostics.com's third lowest OPS Ranking. The following table is list of the acquired web companies with their last share price, the entity that they were acquired by and their OPS Ranking at the time of the buyout:
| Symbol |
Company Name |
Price at Buyout |
Acquired or Bought Out By |
Last OPS Ranking In History |
| ASFD |
ASHFORD COM INC |
0.250 |
Global Sports |
8 |
| ATHY |
APPLIEDTHEORY CORP |
0.031 |
Fastnet Corporation |
N |
| AVGO |
AVANTGO INC |
1.020 |
Upson Linus |
8 |
| CTSI |
CONDOR TECH
SOLUTIONS |
0.050 |
International Shared Services |
3 |
| EFTD |
FTD COM INC |
3.210 |
Capital Group International |
1 |
| ELOQ |
ELOQUENT INC |
0.330 |
Open Text Corp. |
8 |
| EVLV |
EVOLVE SOFTWARE INC |
0.030 |
Primavara Systems, Inc. |
N |
| EXLN |
EXCELON CORP |
3.190 |
Progress Software Corp. |
8 |
| EXPE |
EXPEDIA INC |
72.600 |
USA Interative |
1 |
| EXTN |
EXTENSITY INC |
1.740 |
GEAC Computer Corp. |
8 |
| HOOV |
HOOVERS INC |
6.990 |
D&B |
1 |
| ITWR |
INTERWORLD CORP |
0.230 |
J Net Enterprises |
8 |
| LNTE |
LANTE CORP |
1.092 |
SBI, Inc. bought by
Magic Latern |
7 |
| LOAX |
LOG ON AMER INC |
0.110 |
Earthlink, Inc. |
8 |
| MARX |
MAREX INC |
0.090 |
Exuma Technologies, Inc. |
8 |
| MCAF |
MCAFEE COM CORP |
17.540 |
Network Associates |
1 |
| MLTX |
MULTEX COM INC |
7.410 |
Reuters Group PLC |
1 |
| NETO |
NETOBJECTS INC |
0.030 |
Website Pros, Inc. |
s |
| NULL |
NETGAIN DEV INC |
0.025 |
CoolAudio.com |
8 |
| NULL |
STARNET COMM INTL |
0.925 |
World Gaming PLC |
8 |
| NULL |
NETZEE INC |
0.452 |
Certeg Inc. |
2 |
| PEOP |
PEOPLEPC INC |
0.020 |
Earthlink, Inc. |
8 |
| PRMO |
PROMOTIONS COM INC |
0.820 |
iVillage.com |
7 |
| PRTS |
PARTSBASE INC |
1.490 |
Hammond Acquisition Corp. |
8 |
| RAZF |
RAZORFISH INC |
1.690 |
SBI Purchase Corp |
7 |
| ROOM |
HOTELS COM |
90.670 |
USA Interative |
2 |
| RSNT |
RESONATE INC |
1.940 |
Gores Technology Group |
8 |
| SEQL |
SEQUEL TECH CORP |
0.030 |
Imatec Ltd. |
8 |
| SXML |
SOFTQUAD SFTWR LTD |
0.750 |
Corel Corp. |
8 |
| TMCS |
TICKETMASTER |
21.420 |
USA Interative |
1 |
| UDAT |
UDATE COM INC |
4.800 |
Expedia Inc. acquired by
USA Interative |
1 |
| VCNT |
VICINITY CORP |
3.320 |
Microsoft Corporation |
N |
| VIAN |
VIANT CORP |
1.600 |
Divine Inc. |
8 |
- Web companies featured in StockDiagnostics.com's weekly OPS Newsletter are frequently acquired
Since December of 2002, four of the web companies that have been featured in the weekly OPS Newsletter, which is published by StockDiagnostics.com have been acquired by larger suitors. The most recent of the four buyouts was Overture (NASDAQ:OVER) which announced that it was being bought by Yahoo on July 14, 2003, representing a 64% gain to subscribers. Each of the three other web buyouts occurred within 10 days of being featured in the OPS Newsletter. They include Lending Tree (NASDAQ:TREE) and uDate.com, both of which were bought out by Barry Diller's company, Interactive Corp (NASDAQ:IACI) for gains of 90% and 212% respectively. Multex.com was also bought out by Reuters within seven days after it was featured in the OPS Newsletter representing a gain of 60%.
Additionally, companies attaining historical OPS Ranking highs also have a high incidence of being acquired. Ticketmaster, which was also bought by Diller's Interactive Corp and Hoover's which was bought out by Dun & Bradstreet had both been upgraded to StockDiagnostics.com's highest OPS Ranking of "1" just prior to their respective buyouts.
Web Industries Analysis
- Web Industries are among the best for rapid Cash Flow From Operations Growth
There are 245 industries including eight web industries which are monitored by StockDiagnostics.com for cash flow (Cash Flow From Operations) growth. For the 12 months ended 01/31/03, all eight web industries recorded substantial increases in cash flow from operations. They were led by the On-line retailers' reporting of a 940% increase in growth in cash flow from operations. All eight web industries recorded growth in cash flow from operations of at least 22% as compared to their previous 12 months . Each of the eight web industries ranked among the top 95 out of a possible 245 industries for cash flow growth. The On-line Retailers' Industry led all web industries with a number "3" ranking out of 245 industry groups.
StockDiagnostics.com also assigns Industry OPS Rankings and maintains historical OPS Rankings for all 245 industries. For the 12 quarter period beginning 04/30/00, in which the study was initiated, seven of the eight web industries were generating negative cash flow from operations. At that time six of the web industries had been assigned StockDiagnostics.com's lowest Industry OPS Ranking of "8". Of the remaining two web industries, the "Security Software Services Industry" had an Industry OPS Ranking of "7", StockDiagnostics.com's second lowest. The one remaining industry, the "Large Cap Internet Software & Services Industry" had an OPS Ranking of "1" which is StockDiagnostics.com's highest Industry OPS Ranking. However, even its Industry OPS Ranking was short lived as its Industry OPS Ranking began a precipitous decline over its next four consecutive quarters to an Industry OPS Ranking of "6", StockDiagnostics.com's third lowest.
Fast forward to Industry OPS Rankings for the most recent quarter ended 01/31/03 and things have changed significantly. The Industry OPS Rankings for Six of the eight web industries are now at all time highs and five of the web industries have been assigned StockDiagnostics.com's highest or second highest Industry OPS Ranking. The table below illustrates the Industry OPS Rankings and other pertinent data.
| Web Industry |
Cash Flow % Increase |
Industry Ranking |
Ind. OPS Ranking
History (12 Qtrs.) |
| On-line Retailers |
940% |
03/245 |
888776663332 |
| On-line Information |
192% |
21/245 |
888888888732 |
| Large Cap Internet Software & Services |
114% |
29/245 |
122665511111 |
| Small Cap Internet Software & Services |
89% |
39/245 |
888888888888 |
| Mid Cap InternetSoftware & Services |
84% |
41/245 |
888888888888 |
| Internet Telephone |
73% |
45/245 |
888888888876 |
| Security Software Services |
43% |
70/245 |
732211111111 |
| On-line Financial Information |
22% |
95/245 |
887732211111 |
Not Another Bubble
3 Reasons why this is not another bubble:
- Survival of the Fittest: Web companies have not been able to raise capital. This has eliminated all of the weaker competitors and has choked off new competitors from entering the market to compete. The result is that 243 web companies have gone out of business and over half of the 448 web companies remaining in business are now growing at double digit rates.
- Maturity: Many of the remaining web companies have gone through a maturity process. Unlike the insanity of 1999 and 2000, they have reduced unneeded expenditures, generated positive cash flow and earnings. While 50 web companies including Yahoo have emulated EBAY and now have current track records of at least four consecutive quarters of positive operating cash flow compared to only 16 in 2000, there are still some companies that have not matured. A prime example is Neoforma.com (NASDAQ:NEOF), which has not reported a single quarter of positive cash flow in its entire history. Neoforma recently announced that its free cash flow was a "negative $2.5 million, primarily due to Company-wide bonus payments related to full year 2002 performance".
- Economy of Scale: The web companies that have survived have "economy of scale" business models which are similar to the book publishing Industry. Book publishers have a large upfront cost to underwrite a book and then make more money on each copy that they sell. Web companies have a large upfront cost to build infrastructure and the product or service that will be offered. If the product or service gets accepted into the marketplace they enjoy rising profit margins for each additional customer. During 2002 and the first quarter of 2003, 79 web companies including Lending Tree, Web MD, Stamps.com and CBS Marketwatch.com turned their annualized cash flow from negative to positive for the first time ever.
Study Conclusions
Web Stock Universe Cash Flow Study Conclusion
After the dot com bubble burst in 2000-2001, the new economy was written off with most everyone believing that all web companies would simply evaporate and disappear forever. The basis for this belief was that web companies could never become profitable.
What everyone missed was that web companies were capable of generating significant cash flow and that such cash flow could be the key for web companies to generate fast growing profits. For example, Ebay reported its first ever miniscule profit of $.05 per share for its 12 month period ended March 31, 2000. However, its OPS at $.32 per share was more than six times greater it EPS. For Ebay's last 13 quarters its OPS has consistently been 100% higher than its reported EPS and for its 12 months ended March 31, 2003, its OPS was $1.94 versus its EPS of $1.03. Amazon is another example. Many of its critics have maintained that it will never be profitable and so far they have been right. Yet Amazon which has not recorded a single profitable quarter in its history, recently announced that it was using internally generated cash flow to pay off over $200 million in debt. Amazon for its last two 12 month periods ended March 31, 2003 and March 31, 2002 generated record positive OPS of $.42 and $.12 respectively. And let's not forget Yahoo. Its critics predicted that it would not survive after it became unprofitable in 2001. However, Yahoo's annualized OPS remained positive while it was reporting losses. Yahoo's OPS was $.59 versus its EPS of $.24 for its 12 months ended March 31, 2003.
We caution all investors to be cautious in their selection of web stocks. Approximately 200 web companies such as Priceline.com (NASDAQ:PCLN) currently generate negative annualized OPS or cash flow from operations and thus have suspect business models. Investments in such companies should be avoided until they start generating consistently positive OPS or Cash Flow from Operations.
About StockDiagnostics.com
StockDiagnostics.com monitors OPS or Cash Flow from Operations for over 10,000 publicly traded companies including 700 web companies and regularly issues OPS Ranking upgrades and downgrades. Many web companies including Yahoo (NASDAQ:YHOO), Amazon (NASDAQ:AMZN), Ask Jeeves (NASDAQ:ASKJ) and LookSmart (NASDAQ:LOOK) have appreciated by over 100% since having their OPS Rankings upgraded by StockDiagnostics.com over the last 12 months.
The weekly OPS Newsletter which is published by StockDiagnostics.com regularly features web companies. Several of these web companies have appreciated by over 100% including BankRate (NASDAQ:RATE), FindWhat.com (NASDAQ:FWHT), J2 Global Communications (NASDAQ:JCOM), United Online (NASDAQ:UNTD), Youbet.com (NASDAQ:UBET), uDate.com (OTCBB:UDAT) and Secure Computing (NASDAQ:SCUR).
Comprehensive current and historical OPS, OPS Rankings and Cash Flow from Operations and revenue data on all web companies is available at the "Web Universe" section of this web site. Subscribe now and try it FREE!
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