Originally, the article appeared on The Electronic Newsstand, a few days before Netscape went public. Since then, Netscape has split, so you might want to divide the prices below by two to compare them with Netscape's current price.)
Netscape Communications Corporation has filed for an Initial Public Offering (IPO) of shares of common stock. My current understanding is that the IPO has been subscribed (indeed, oversubscribed), and trading will begin in the after-market August 8th or 9th.
This raises the following question:
What do you think a share of Netscape will be worth at the close of of trading on August 8 (assuming that is the first day of trading for the stock)?
First, I'll offer my opinion. Then we can get yours. Let's see how close we come to guessing the initial price.
The initial offering is for 3.5 million shares, or about 10 percent of the total shares in the company. Their stated goal is to raise about $45 million, which suggests that they value the entire company at about $450 million, and that they expect the initial price per share to be about $12 to $14 per share. A prospectus may be obtained from Morgan Stanley or Hambrecht and Quist. Robert Speirs has a page you can use to fax a request for a prospectus.
Netscape has not yet had a profitable quarter. In the second quarter of this year, it lost $1.6 million on sales of $11.88 million. In the first quarter, it lost $2.7 million on sales of $4.7 million.
As a disclaimer, let me point out that I am not a stock broker or an investment professional of any kind. A qualified professional would understand things like income statements, intangible assets, and footnotes to financial statements. I cannot handle any of that stuff. On the other hand, Netscape does not strike me as the kind of company you analyze with an accountant's green eyeshade. It's a "concept" stock, and it all boils down to whether you like the concept and its execution.
An idea that has occurred to one or two people is that if you can provide a tool that is used widely in enabling electronic commerce, then you can in effect get a small piece of all these billions of dollars of transactions, and these small pieces will themselves add up to a nice pile of money.
Netscape aspires to be such a tool. The concept is that the Web will become the first major electronic marketplace, and that Netscape will be an indispensable component of the Web.
From that perspective, Netscape doesn't need to get any revenues from individual consumers. Nor does it need the advertising revenues that it gets from selling links on its home page. What it needs is lots of companies like MCI, with big budgets for Internet commerce burning holes in their wallets. Netscape needs all of the corporate lemmings to stampede, saying "We've got to have a foothold in electronic commerce. We've got to get Netscape."
What about Microsoft? Cynics have pointed out that the Netscape IPO is timed to take place shortly before the release of Windows 95 and Microsoft Network, a development which some say means that Netscape's market share has now peaked.
Microsoft has some big weapons in its arsenal--the new network, marketing leverage, etc. However, on the side of the business where the money is--software for running Web servers--their entry is based on Windows NT, which is OK, but certainly does not dominate Unix for servers the way, say DOS/Windows dominates Apple for the PC market.
Moreover, even if Microsoft takes the cake, there may be substantial crumbs for Netscape. There is going to be room in the electronic commerce software business for more than one player (figure that if the market doesn't make room, the antitrust agencies will). If corporate America were to buy $500 million of browser/server software a year, and Netscape were 20 percent of that, they still would have a nice chunk of revenue.
What about potential upstarts? Can't any good hacker put together a Web browser? Perhaps it can be done, but that misses the point about what will sell to corporate America. The fact that they can save a few thousand dollars by going with a no-name Web company is not going to mean anything to people making decisions at big companies. They will be quite satisfied to go with a brand name, even if there might be slightly better value for the dollar in another package.
Another question is, how long is the window of opportunity for the Web to be the main driver of electronic commerce? Right now, we are still waiting for the cultural changes to take place that will cause people to start justifying Web Hype by actually buying stuff. Down the road, we have much greater bandwidth, which presumably makes current Web technology obsolete. What is the window period in between? 10 years? 5 years? Or is it zero, with the Web going down as one of the great mirages of commercial history?
If we take it as given that the Web is going to have a relatively short useful life, then Netscape is not a growth stock in the traditional sense. It's more like a trendy rock band, trying to cash in while it's hot.
Overall, the concept looks good to me. That brings us to the next question.
It appears to me that Netscape took a rather narrow view of the Web software market. They decided to challenge NCSA Mosaic (the freeware that was first developed by Marc Andreessen and other programmers later hired by Netscape) for the existing browser market, but not to try and broaden the market.
What Netscape did in the latter half of 1994 was to introduce faster page retrieval, along with a few publishing capabilities (a centering capability and that infernal tag). What they did not do was address the dominant problem at that time, which is that the difficulty of installing and configuring TCP/IP was keeping a lot of potential users out of the Web market. This problem they left to Netcom, Prodigy, Compuserve, AOL, IBM, and Microsoft to solve. The result is that a large and commercially important market now uses NetCruiser (Netcom), Prodigy, Spry Mosaic (CompuServe), Internet Works (AOL), and Web Explorer (IBM) as browsers, with Spyglass Mosaic (Microsoft) soon to join the fray.
What Netscape has done so far in 1995 has been to add "cool" publishing capabilities, such as background colors and column alignment. This probably has helped keep Netscape in good graces with the staff of Wired Magazine. Wired, which pioneered the user-hostile graphical interface in print, should be happy with all of the hard-to-read shading and indecipherable menu bars that have been spawned by Netscape's "enhancements." Those of us who appreciate clarity, organization, and quick downloading time are not as pleased, but I suppose we are not the tastemakers.
What Netscape has not done so far in 1995 has been to add practical infrastructure to the Web. How about a "registration" protocol so that I can register with any site at the push of a button, and after I've registered once for a site it recognizes me and doesn't ask me to type in a password? How about a "purchase authorization" protocol where my credit card number is part of my configuration, just like my email address, so I don't have to type it?
If Netscape does not start to make these commercial capabilities generic, then they will be conceding the field to Microsoft. Microsoft Network's strategy is to use its infrastructure advantages to outmaneuver the Net.
But we're not asking what Netscape is worth, we're asking what people will pay for it. And there, the story is different. My guess is that when the IPO comes out, you won't be able to touch it for $15. I don't think you'll even be able to touch it for $30.
I've never invested in an IPO, and I have no background in the IPO market at all. But my thinking here is that this looks like a case of too much visibility chasing too few shares.
I mean, suppose that 35,000 Netscape users each decide to buy 100 shares of stock in their favorite browser. You've placed the whole IPO right there! And I assume we will see a number of institutions, including some mutual funds for whom $45 million is chump change, who will want to be able to say in their year-end reports that they took a position in the Internet market and have a sexy brand in their portfolio.
Finally, there is the fact that none of us has a clue what this stock really is worth. In such an environment, we are likely to see the "winner's curse" phenomenon, where the people who end up owning the stock are the ones with the most extravagant hopes for it.
So my prediction is $39 a share on Day 1, and that the first-day buyers will have an opportunity to sell at a profit in the days that follow. Please, please don't take that as expert advice. If you haven't gotten the point already, I'm no more qualified than the Man in the Moon to evaluate this IPO.
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