Analysis: After Web stocks boom, investors wary but rout unlikely

Analysis: After Web stocks boom, investors wary but rout unlikely Sun, Dec 29 09:03 AM EST image By Alexei Oreskovic and Rodrigo Campos SAN FRANCISCO/NEW YORK (Reuters) - For investors in internet stocks, it was a banner year: shares of many companies doubled as revenue climbed and on forecasts for rip-roaring growth in earnings. But the gains haven't been anxiety-free, thanks to uncomfortable memories of the 1999 Internet bubble and subsequent bust. Market strategists and tech experts say the comparison is overblown. While there is the potential for a decline in some Web company stock prices that are out of line with their earnings outlook, they say there is little chance of a bloody retreat. Most importantly, this year's stars, such as Facebook and Netflix, actually make money. Many of the web companies that were emblems of the previous era had little prospect of ever being profitable and some hardly had any revenue - basing their boasting on non-financial metrics such as numbers of eyeballs, or page clicks. The Internet and the ways people use and access it have been transformed in the past 14 years. In 1999, it was mainly through slow dial-up services using a desktop computer, now there is faster broadband and mobile access from phones and tablets. Web-based advertising has grown into a mature, viable business, and computing speeds support video and sophisticated gaming. The market is much more rational than it was in 1999, argues Jeff Dachis, who co-founded and was chief executive of Razorfish, an online ad firm that went public in 1999, and is now part of France's Publicis Groupe. "What you had then was 100 times the volume of stock with little to none of the credibility or weight in the marketplace that a Facebook or a Twitter has today," said Dachis. "Nobody denies now the growth of online advertising or digital marketing." WARNING SIGNS Facebook, Google and Netflix are among the internet companies set to finish 2013 at or near record highs. Less-weighty Web companies such as Yelp and Pandora saw their shares triple. That is not to say there aren't warning signs. The 160-percent gain in shares of Twitter since its November initial public offering raises awkward questions about the levels of speculative froth given the company has not yet earned a cent. Also, consumer names like Snapchat and Pinterest are raising eyebrows by garnering millions of dollars in financing at multi-billion dollar valuations - despite being decidedly in the red. According to CB Insights, there are 26 U.S. tech companies that have raised financing at valuations of $1 billion or more and that could go public in 2014, including Uber and Square. Hedge fund manager David Einhorn, who has often taken short positions on richly valued stocks, in October asked in a letter to investors whether history was being repeated. "When ... conventional valuation methods no longer apply for many stocks, we can't help but feel a sense of déjà vu," he said. Still, internet companies are trading at much cheaper valuations than their counterparts in the late 1990s. The stratospheric multiples that defined companies such as Webvan (388 times revenue in 1999) and VerticalNet (268 times sales) are unheard of today. Twitter, which trades at 73 times its past year's revenue, is among the most richly valued Web stocks by that measure. Google, Netflix and Salesforce.com all trade at below 10 times their trailing twelve-months' revenue. "The end markets - internet advertising, online retail, online travel - those markets are just dramatically more developed today than they were in ‘99, 2000," said Mark Mahaney, who began his career covering internet stocks in the 1990s at Morgan Stanley, working with star internet analyst Mary Meeker. TOIL AND TROUBLE The bursting of the dotcom bubble ranks among investment history's greatest debacles. From its peak of 5123.52 on March 10, 2000, the Nasdaq Composite Index lost 78 percent of its value in just over two-and-a-half years. Nearly 14 years later, the Nasdaq has still not regained those lofty levels even as most other major U.S. averages have surpassed previous highs, another indication that the market is far from where it was back then. The turn of the decade came replete with stories about extravagant parties, unabashed flogging of dubious names by investment professionals and startup CEOs, and tales of cash outlays that boggle the mind today, including a Super Bowl 2000 that saw nearly 20 dotcom companies spending about $1.1 million apiece on advertising spots - just before many went under. At the end of 1999, 8 out of 10 of the most highly valued stocks were tech companies, led by Yahoo trading at almost 577 times projected 2000 earnings, according to S&P Dow Jones Indices. Fellow dotcom-era corporations America Online and Cisco Systems Inc - the latter prized because it dominated the market for networking equipment that enabled internet connections - clocked in at 223 times and 102 times, respectively. Fast-forward to 2013, and just four dotcoms rank among the year's 20 biggest gainers on the S&P 500, led by Netflix's quadrupling. Yahoo is at No. 10 after having doubled. Facebook has more than doubled. Other big gainers include Best Buy and Micron Technology. "The consensus view in the market is that things are bubbly but since the valuations are not as expensive as 1999, there is room to run," said Mike O'Rourke, chief market strategist at Jones Trading. But he said such thinking may be flawed and cautioned that using one of the most expensive periods in stock market history as a comparison is extremely risky, with a limited reward. "When bubbles pop a large portion of the gains are erased very quickly," O'Rourke said. IPOS MUCH FEWER The lack of newly listed internet stocks provides some relief for those concerned about a possible bubble. There were only five U.S. internet IPOs in 2013, including Twitter, compared with 86 in 1999, according to Thomson Reuters data. In fact, the number of IPOs in 1999 is greater than the combined number of public offerings every year since then. Many companies may simply be waiting longer to take the plunge, debuting at a far more advanced stage of development than the wave of 1999 dotcoms. Facebook, an extreme example, went public with a valuation of more than $100 billion. "Anything and everything - regardless of how asinine the business model was - was going public and getting ridiculous valuations" back in 1999, said Ryan Jacob, chief executive of the Jacob Funds. Take eToys, the online toy store whose shares quadrupled on their debut in 1999. It spent tens of millions of dollars on pricey TV ads only to file for bankruptcy in early 2001. With low interest rates and signs that the U.S. economy is strengthening, internet valuations could go higher in 2014 - though nowhere close to 1999 levels, Jacob says. He points to LinkedIn's 14 percent decline since more than doubling in the first nine months of the year, as sign that investors aren't losing their heads. "You did have a part of the market that got ahead of themselves, and then took a breather" in 2013, Jacob said. (Editing by Edwin Chan, David Gaffen and Tim Dobbyn)

Facebook rolls out friends-based search product

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Facebook rolls out friends-based search product Tue, Jan 15 17:35 PM EST 1 of 5 By Alexei Oreskovic MENLO PARK, California (Reuters) - Facebook Inc took the wraps off a new search tool on Tuesday that lets people trawl their network of friends to find everything from restaurants to movie recommendations, an improvement that's likely to increase competition with review websites like Yelp and potentially even Google Inc. The so-called graph search marks the company's biggest foray into online search to date, though it displays only information within the walls of the social network rather than links to sites available across the Internet. Mark Zuckerberg, Facebook's 28-year-old founder and chief executive, introduced the new product at the company's first major product launch since a rocky initial public offering in May. "Graph search is designed to take a precise query and return to you the answer, not links to other places where you might get the answer," Zuckerberg told reporters at its Menlo Park, California, headquarters. "What you've seen today is a really different product from anything else that's out there." Facebook shares, which have climbed 15 percent since the start of the year, slid 3 percent Tuesday to just above $30. The product news fell short of some of the most optimistic predictions, which included speculation that the social network would introduce its own smartphone or an Internet search engine. Dubbed "graph search" because Facebook refers to its growing content, data and membership as the "social graph," the function will be available at first only as a "beta," or trial, for just hundreds of thousands of its billion-plus users. It will let users browse mainly photographs, people, places and members' interests. Zuckerberg stressed that people can sort through only content that has been shared with them, addressing potential privacy concerns. Shares in Yelp dived more than 6 percent on fears that Facebook's new friends-based search concept will begin to draw users away from the popular reviews site, which also lets people maintain a circle of trusted friends. Google stock held steady. Some analysts said Facebook may be taking a tiny step toward eventually challenging Google on its home turf, but said that was a much more challenging undertaking and a long-term possibility at best. Zuckerberg stressed that the new graph search did not encompass Internet searches, Google's specialty. Sterne Agee analyst Arvind Bhatia said the product was inevitable. "We think this will enable them to expand beyond display ads and ultimately compete with Google," he said. THE PROMISE AND THE THREAT The world's largest online social network, Facebook is moving to regain Wall Street's confidence after the IPO and concerns about its long-term financial prospects. Zuckerberg said the company is working on making money from users who are migrating to mobile devices. He said he could foresee a business in search over time, but analysts advised caution. Facebook has come under fire numerous times for unclear privacy guidelines. While Tuesday's revelation fell short of some of the wilder guesses about what Facebook planned to reveal in its highest-profile news briefing since its market debut, analysts said it was overdue for a well-rounded search tool, given its current inadequacies. Zuckerberg promised that users will be able to tailor their searches, specifying music and restaurants that their friends like, for instance, or their favorite dentist. The reverse is also possible, such as discovering friends who have an interest in a particular topic. "You need to be able to ask the query - like, who are my friends in San Francisco?" Zuckerberg said. "It's going to take years and years to index the whole map of the graph and everything we have out there. We'll start rolling it out very slowly. We're looking forward to getting it into more people's hands over coming weeks and months." Wedbush Securities analyst Michael Pachter argued that recommendations from trusted friends were more valuable than from strangers on the Web. Forrester analyst Nate Elliott was less sanguine. "Facebook's worst nightmare is a static social graph; if users aren't adding very many new friends or connections, then their personal network becomes less and less active over time," he said. "Terrifyingly for Facebook, that threat is very real: We haven't seen significant growth in the average number of friends per user recently." (Additional reporting by Malathi Nayak in San Francisco and Himank Sharma in Bangalore, writing and editing by Edwin Chan; Editing by Phil Berlowitz and Prudence Crowther)

Customer service app Tello raises $2.7M

Fri, Mar 02 15:02 PM EST

Tello, a mobile application service that connects consumers with businesses in order to improve customer service, received $2.7 million in funding today.

Photo via William Hook/Flickr

Through Tello’s app, customers can direct feedback straight to a vendor — feedback about the business as a whole, an individual employee, or a specific experience, whether good or bad — to help vendors refine problem areas and ultimately increase sales. The system promises to be more effective and open to possibilities than surveys. For example, if a disgruntled patron walks out of their neighborhood shop, they can log in to Tello and provide feedback immediately.

Currently, the masses flock to Yelp, Facebook, and Twitter to voice negative experiences and demand reimbursement. Tello says it expands on that trend by enabling users to request a response from managers. Tello’s aim is to connect both parties instantly and give business owners a real-time look into employee ratings, metrics, and more.

“As every savvy businessperson knows, the key to building a sustainable company is repeat business and loyal customers. A focus on listening to your customers and adapting your business goes a long way to achieving just that,” said chief executive officer Joe Beninato in a statement. “Tello for business gives companies both big and small a scalable platform to monitor customer feedback and resolve service issues that can have a direct effect on sales.”

Tello first debuted its app at the TechCrunch Disrupt conference in September 2011. It evolved over the last year and now equips customers to interact via text messages and a thumbs up/down system.

Beninato launched this Palo Alto-based startup in February 2011. Before Tello, Beninato started Presto, a venture-backed firm in collaboration with Hewlett-Packard.

This is Tello’s first round of funding, led by True Ventures, Bullpen Capital, and SV Angel. Other investors include 500 Startups, Felicis Ventures*, Forerunner Ventures, Founder Collective, Lowercase Capital, Mark Goines, Naval Ravikant, Russ Siegelman, Shervin Pishevar, Tim Donmoyer, and Transmedia Capital.

* Disclosure: Aydin Senkut of Felicis Ventures is an investor in VentureBeat.

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