American Consequences - August 2017

It went public at $13 per share on December 10, 1999. It raised $195 million in that IPO, and its share price peaked at $14.56. By Barach’s May 2000 interview, MotherNature. com had $35 million left with no profits in sight. And its share price had collapsed to $2 (-86%). When asked if public-equity markets were crazy to emphasize growth and brand building to the exclusion of everything else, Barach told the Wall Street Journal , “ Only history will tell, but it makes a lot of sense. The capital markets and the public chose to finance the Internet .” Asked about his company’s initial strategy, Barach said, “ We had a GBF strategy. GBF stands for Get Big Fast... Growing revenue does not blend well with becoming profitable. But it’s OK as long as the market rewards that .” Like Galloway seems to do, Barach accepts the stock market’s verdict without question. Also like Galloway, Barach focused on the short term, specifically the recent past. He wasn’t thinking about getting a long-term return while recognizing and controlling risk. At the time of the interview, MotherNature. com had abandoned “Get Big Fast.” According to Barach, the company was already operating under “ a totally different mindset ,” spending “ as little money as possible ,” and it was “ not as focused on 40% growth .” “ It’s relatively easy to buy revenue ,” Barach concluded . “ What’s hard is to get profits. ” shut down in early 2001. Barach learned all too late that GBF is no

substitute for profits – the singular financial hallmark of a real business . Another quick example is Global Crossing, the dot-com era telecommunications provider that wanted to connect the whole world with fiber-optic cables. There was plenty of growth there, and lots of vision too. Investors loved it. Revenues grew nearly tenfold in just three years, from $420 million in 1998 to $3.8 billion in 2000. But it was unprofitable and overleveraged. Global Crossing racked up $2.3 billion in net losses and more than $12 billion in debt. The company started up in 1997, went public in 1998, and went bankrupt in 2001. Paying up for losses because you think you’re buying the next Amazon is crazy (or at least super risky). But overpaying for a profitable company can destroy your long-term returns, too... IT and networking World Dominator Cisco Systems’ revenue grew roughly tenfold from $2.2 billion in 1995 to $22.3 billion in 2001. It earned a big profit every year (and still does). But anybody who bought the stock between November 1999 and January 2001 is still underwater almost 18 years later . If you paid the all-time high price of around $80 a share in 2000, forget about breaking even in this lifetime. Shares are around $33 right now. It’s the same with Microsoft. The software giant grew revenues nearly threefold, from $8.7 billion in 1996 to $25.3 billion in 2001. It made huge profits every year. But if you bought it at the 2000 top, you had to wait 17 years to break even.

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