Gist: Investor Jay Altucher says the internet is dead as an investment. Internet may be a dead investment, but only if others are. Old media certainly isn’t immune either. However, the internet does suffer from drawbacks that do make it a prime easy shot for “this sector is dead”ing: immediate accessibility, lax focus on profits, the free vibe, and the IPO market being as exciting as drying paint.

In a Dow Jones Newswire Column, asset management investor Jay Altucher argues that the internet is dead as an investment. He cites public companies in the technology/internet sector that aren’t really doing so well, despite looking it, as he says:

Time Warner (TWX) would rather keep their legacy old-media businesses like People magazine than hold onto one of the biggest Internet companies out there, AOL. And News Corp. (NWSA) is shaking up its MySpace business as it figures out its next steps. (News Corp. owns Dow Jones, publisher of this newswire.) Microsoft (MSFT) has spent billions on Internet strategy without a dime of profit. And even Google (GOOG) can’t seem to find any other business model other than the one they stumbled into when they bought Applied Semantics in 2001 that had a little piece of software called AdSense. And the new guys: Twitter and Facebook are still scrambling for profits despite blistering usage growth.

Altucher cites these examples to substantiate that the internet is a dead sector that, while the public requires, he doesn’t require in his portfolio. The internet sector seems like it doesn’t make any money, or at the best, has P/Es of 15 (that’s… alright?).

What about the nuts-and-bolts guys? Cisco (CSCO), at 15 times earnings, trades in line with the S&P 500. Buy them when they start giving a steady dividend.

This is a pretty interesting argument that to the reader instills the idea that the internet is not an excellent sector to invest in. However, you’ll also see old-media struggling with revenue generation. For a staggering example, try the New York Times Company (NYT) that since Jan 2008 has seen its stock drop 70%, and hasn’t paid a dividend for nine months after paying dividends every 3 months since 1987.

Altucher says that the new companies to invest in, instead of the “…infinite margins, 1,000% productivity gains, and growth of market throughout the universe…” kind of securities that are apparently representative of internet stocks, are the “boring,” but effective, stimulus receivers.

However, there are some problems that skew the public perception of the market:

1. The internet is immediately accessible. The products of a certain public company in the internet sector are, for the most part, available online. This gives a close connection between investor and investment. Whereas one of the examples he cites, “…LNN, Lindsay Corporation, that does boring stuff like highway repair (they make those orange cones) and helps upgrade water infrastructure” — this is certainly not very accessible to the investor. Perhaps a bit different story if you turn off your mind and simply invest on fundamentals, but the appeal of instantaneous connection on the internet gives a different mindset to the investor.
2. The real deal is profits. The internet has few monetization channels, right? Right? Not true, but that’s the vibe. Nothing but the user is stopping a web company from having the user take their wallet out and pay hard cash. It’s not just advertising, but that’s the only thing we’re seeing from some of the companies that Altucher cites: Microsoft with their advertising strategy, Google with their advertising strategy (and almost literally not making money from anything else; on the contrary, being in the red), and Twitter and Facebook. Advertising isn’t the only way. It’s a way, but it’s a way that requires volume and very smart execution.
3. The free vibe isn’t over, either. Free is still an extremely popular option for startups that most take, and that some require to generate scale and volume. However, things have to stop somewhere, and that’s where most startups make mistakes. (And honestly, it’s very, very, very difficult to get it right.)
4. I can count how many notable IPOs there have been this year on one hand. It’s simply not the environment for IPOs, or even funding at all.

Startup Takeaway: Monetize. Now.

Tags: google, internet, investing, investment, microsoft, monetization, profits, startuptakeaway

This entry was posted on Sunday, July 19th, 2009 at 10:36 am and is filed under Analysis, Business. You can follow any comments to this entry through the RSS 2.0 feed. You can leave a comment, or trackback from your own site.