Online Extra: Checking Up on BW's Web 20

The last few months have been a wild ride for our portfolio of Net picks due to a turbulent fourth quarter. So we're weeding out the losers and scouting for value

By Tim Mullaney

If only I quit while I was ahead. The latest edition of the BW Web 20, the model portfolio of 20 blue-chip Internet stocks that I update every six months, was cruising along in early January, up about 30% since the last update in August (see BW, 9/5/05, "How The Web 20 Whipped the Street"). But sic transit gloria when a bad Google (GOOG ) earnings report hits. If you actually owned the Web 20, which is composed of 100 shares of each stock on the list (adjusted for splits since each company joined our three-and-a-half-year-old portfolio), you lost about $15,000 in the first 10 days of February. It's worth about $120,000 now.

The reason: A lot of companies on the list had a bumpy fourth quarter, led by Google's Jan. 31 earnings report. And between shaky performance and soft guidance from some companies for 2006, there were a lot of reasons to be concerned. Yes, the U.S. Internet economy is growing about six times as fast as the overall economy. But with each earnings miss, valuations get a little more conservative, as people -- quite rationally -- decide not to pay a premium for growth when companies are larger and steep growth is less assured.

Since we use the Web 20 as a way of framing choices for small investors who may not have a pro's tolerance for risk, we replaced some of our recent losers as well as one company that got acquired with stocks that are a little cheaper but still promising.


  The Web 20 dropped six companies this time around. Gone are (AMZN ) and audiobook-download service Audible (ADBL ), both snipped because I'm wary of their high valuations. Also out is parent Provide Commerce (PRVD ), which has been acquired by Liberty Media (L ). And earnings underperformance or bad guidance led me to pull Chinese online-gaming company Shanda Interactive (SNDA ), Web-based real estate broker ZipRealty (ZIPR ), and online cell-phone merchant InPhonic (INPC ).

The new names: ad agency Digitas (DTAS ), software maker Websidestory (WSSI ), parent J2 Global Communications (JCOM ), online broker TD Ameritrade (AMTD ), university-focused software maker Blackboard (BBBB ), and online print shop VistaPrint (VPRT ).

Here's how the old Web 20 companies have done since we last visited them in August. Of the 20, 12 were up and eight were down between Aug. 22 and Feb 21. The overall 11.5% gain reflects the heavy weighting of higher-priced stocks, especially Google. But eight of the existing Web 20 are down 10% or more since Jan. 1, reflecting the market's jitters about higher-valuation stocks. Together, they provide a snapshot of how the Web economy is doing now. (AMZN )

Change since 8/22: -12.5%

Fourth-quarter results included guidance that assumes heavy investment in search services and digital-content delivery. Bearish analysts cite failure to expand margins as much as hoped and top-line growth slower than e-commerce as a whole.

aQuantive (AQNT )

Change since 8/22: +52.9%

Fourth-quarter earnings at top online ad agency beat expectations by a penny a share. But after shares tripled in 2005, Street is wary of now-fat price-to-earnings ratio of about 60.

Audible (ADBL )

Change since 8/22: -22.6%

Audible lost about $2 million in the fourth quarter, two cents a share less than analysts expected. In a more aggressive market, the Web 20 would hang tough, but right now the stock price, at 51 times 2006 estimates, is too high for us.

Blue Nile (NILE )

Change since 8/22: +0.7%

Recent darling fell $8 a share after missing fourth-quarter profit estimates by 12%, or four cents a share. The e-jewelry store's weak sales growth (13%) and higher prices for search-based advertising were blamed. A classic example of how high expectations can let a stock's price get lofty, leading to disappointment.

Checkfree (CKFR )

Change since 8/22: +31.0%

Shares are cruising after fourth-quarter earnings beat estimates by three cents a share. Company makes software banks use to run online banking and bill-pay services.

CTrip (CTRP )

Change since 8/22: +23.5%

Leading online travel agency in China earned 47 cents a share in the fourth quarter, eight cents more than the Street expected. Analysts see 25% profit growth this year.

Digital River (DRIV )

Change since 8/22: -6.9%

Investors worry that Microsoft's (MSFT ) entry into computer-security software will hurt Digital River, which delivers Symantec's virus-protection products over the Net. But the stock rebounded after a strong fourth-quarter report. Dependence on Symantec remains Digital River's No. 1 problem.

eBay (EBAY )

Change since 8/22: +4.2%

The online-auction company beat fourth-quarter profit estimates by 9%, but traded lower after not raising 2006 guidance to where investors expected. Some analysts think the company can easily beat current estimates.

Expedia (EXPE )

Change since 8/22: -7.5%

A big gainer until fourth-quarter profits came in light by six cents a share (20 cents vs. the expected 26 cents). Lower-than-expected international growth and shrinking margins in hotel sales were culprits.

Google (GOOG )

Change since 8/22: +33.8%

Hit operating-profit targets, but big hike in tax rates made the search-engine leader miss net-income estimates badly. Stock fell almost $140 after reaching $475 a share in January, but has benefited overall from strong growth and market share gains.

IAC/InterActiveCorp (IACI )

Change since 8/22: +10.5%

Beat fourth-quarter estimates on big gains at Ticketmaster and lending units, but expected 2006 investment in search engine Ask Jeeves will keep profit growth lower than hoped.

InPhonic (INPC )

Change since 8/22: -49.7%

Joined the Web 20 last April. Our worst pick since. Analysts faulted different problems in second- and third-quarter reports. Whacked again Feb. 22 on weak fourth quarter.

Infosys (INFY )

Change since 8/22: +0.5%

Indian tech outsourcer met December-quarter forecasts and is expected to earn about $556 million ($2 a share) for the year ending in March and grow 20% in fiscal 2007.

Netflix (NFLX )

Change since 8/22: +20.0%

DVD-by-mail service beat estimates by two cents a share (or 13%) as it turned back Blockbuster's (BBI ) challenge to its online store. Company plans to pour extra money into marketing if it's ahead of profit goals during the year, in a bid to gain market share.

Provide Commerce (PRVD )

Change since 8/22: +26.3%

The parent of was acquired in what's expected to be a string of Web purchases by Liberty Media (L ). Up 89% since joining the Web 20 in August, 2004.

Quality Systems (QSII )

Change since 8/22: +10.7%

Maker of software that doctors use to automate patients' records has been volatile. A fourth-quarter earnings miss is one reason. The company blamed delays in recognizing revenue from a $4 million sale.

Shanda Interactive (SNDA )

Change since 8/22: -55.0%

Government interference and young markets make Chinese Web media stocks like Shanda hard to predict. Shanda tanked as analysts cut 2006 profit estimates to $1.06 a share from $1.79. Cisco Systems (CSCO ) bought a stake this month, but the risk may be more appropriate for pros than mom-and-pop investors.

Websense (WBSN )

Change since 8/22: +24.3%

Maker of software that lets employers' track staffers' Internet usage beat Street forecasts by three cents a share in the fourth quarter. Still relatively cheap with a PE of 31.

Yahoo! (YHOO )

Change since 8/22: -2.4%

Expensive shares had little wiggle room when Yahoo missed fourth-quarter expectations. Estimates for 2006 have fallen sharply, as analysts factor in the impact of expensing stock options, and its PE is still above 60.

ZipRealty (ZIPR )

Change since 8/22: -29.5%

Missed third-quarter estimates by 2 cents a share (11 cents vs. 13), but the tougher problem may be convincing investors that any real estate related stock isn't in for a tough time in a slowing market. Fourth-quarter report is due Feb. 28.

Mullaney is BusinessWeek's e-Business editor, based in New York. He does not own securities of any of the companies named here.

Edited by Patricia O'Connell

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