Despite widening losses, deteriorating cash flows, and increased difficulty in raising capital, some Internet industry sub-sectors are retaining or even expanding their market value, according to a study by Mercer Management Consulting.
Mercer’s study, “Internet Economy Stock Market Value Flow,” analyzed more than 400 U.S.-based and 200 European-based Internet organizations. It found that a fundamental redistribution of value is under way in the new Net economy, helped along by steep declines at the great majority of organizations within the six surveyed segments.
Among the bright spots to report: Mercer found that infrastructure hardware companies in the US added 3 percent in value so far this year. Security software firms were close to break-even. Far more prevalent, however, was the evidence of widespread shareholder value destruction, including a 70 percent loss among B2C e-commerce companies and more than 80 percent losses incurred by B2C portals, B2B marketplaces, and Application Service Providers (ASPs).
“Infrastructure and software companies in the US are increasing their share of value, while B2Cs, B2Bs, ISPs/ASPs, and consultants have lost share,” said Mercer VP Tim Byrne. “Value is rapidly flowing to the few remaining profitable companies.”
The study found that as of February of 2000, only 12 percent of Internet sector companies were profitable and that they controlled 38.5 percent of the sector’s market value. By November of 2000, about 14 percent of Internet companies were profitable, but their share of the value had jumped to more than 56 percent.
“Those Internet companies able to ultimately create shareholder value will be the ones that constantly challenge their own business design,” Byrne said.
The Mercer study also found that:
- European Internet firms have experienced a more moderate value decline than their US counterparts. However, only 22 percent of market value is concentrated in profitable European firms, an indication of possible trouble ahead.
- Venture capital funding closely parallels the value flow patterns seen in public markets with one notable exception: VC funds continue to put a disproportionate amount of money into the B2B sector, despite the poor performance of B2B companies in the public markets.
- Year 2000 cash flow losses at US-based Internet companies may come close to doubling those of last year.
“Venture capitalists still have opportunities within the Internet sector, but they’ll have to dig a lot deeper to find companies with profitable business designs,” Byrne said.