Burnham's Beat

2008 Internet Stocks: Year In Review Plus 10 Best and 10 Worst Stocks

Internet stocks outperformed the market in 2008, albeit in the wrong direction.  Overall, the internet sector declined -52.2% during 2008 vs. the NASDAQ's -40.5% decline and the S&P 500's -38.5% decline.

Out of 128 year-end stocks in the sector, the average stock declined by -52.3% and the median stock declined by -56.2% indicating that declines were pretty well balanced across small and large cap Internet stocks.

It's interesting to note that Google, which accounts for a whopping 41% of the sector's capitalization was down 56%, slightly more than average, which means that Google actually underperformed the Internet sector as a whole.

Believe it or not, but only 4 Internet stocks or just 3% of the total managed to post a gain in 2008.  That means that 60% of the Top 10 performing Internet stocks of 2008 actually lost money.  See for yourself:

2008 Top 10 Best Performing Internet Stocks

About the only notable trend in the Top 10 was the strength of Chinese Internet stocks which is kind of surprising given that the main Chinese market was down 65% for the year.  Some of this may have to do with the fact that Chinese Internet firms already traded at very low relatively PE's prior to the crash but in general it's a bit confusing.

In terms of losers, as with our review of Software stocks, the competition to make the list of Top 10 losers was fierce and required an even bigger decline to make the list.

2008 Top 10 Worst Performing Internet Stocks

No real trends here either except to point out the that top two companies changed their names during the year as part of a rebranding/restructuring exercise.  Kowabunga indeed!

2008 Software Stocks: An Oveview Plus The 10 Best and 10 Worst

While software stocks got hammered in 2008, they basically declined "in line" with the rest of the market as the total software market cap was down 40.9% which is just about equal to the NASDAQ's 40.5% decline and just slightly worse than the S&P 500's 38.5% decline.  As I noted in my piece on 2008 Software M&A, total software market cap now stands about 25% lower than it was five years ago.  Ouch!

Out of 231 year-end stocks in the software sector, the average stock declined -45.8% indicating that large caps out performed small caps during the year.  The median stock declined -49.3% or put another way, about 1/2 of all software stocks declined by just about 50% or greater during the year.  Yes, it was as bad as you think it was

Just 16 out of 231 or 7% of software stocks managed a gain in 2008.   For amusement's sake, here's a list of the Top 10 stocks in 2008:

Top 10 Best Performing Software Stocks of 2008

A couple interesting notes about this list of winners:

1. Medical Administration was the clear "Defensive Niche" of the year winner in software.  While overall the sector still declined 8.5% (the next best sector, network management, declined 20.4%), it obviously rode out the market much better than anywhere else.  Some of this out performance undoubtedly was due to speculation that the health care sector will benefit from an Obama administration.  It will be interesting see if that actually turns out to be the case in 2009.
2.  6 of 2008's Top 10 actually declined in 2007, a year in which the software sector was up 14.2%.  This indicates that most of these "winners" were stocks that recovered from poor fundamental performance in 2007/2006. 
3. Autonomy and S1 were the only stocks to the make the Top 10 Gainers that also posted double digit gains in 2007.  Autonomy was up 72% in 2007 while S1 was up 32.5% in 2008.  S1's gain is all the more impressive given that it's core customer base is composed of retail banks.

In terms of losers, the competition was fierce, but a handful of stocks went the extra mile and were able to qualify for the Top 10 Losers in 2008.  To gain entrance to this elite group, a stock had to decline by a minimum of 85%!

Top 10 Worst Performing Software Stocks of 2008

Not much to say about this list other than it was interesting to see that three gaming companies made the list (Atari would have made it too but it went bankrupt earlier in the year) which suggests that gaming is indeed a "hit or miss" sector and this year it had quite a few misses

2008 Software M&A: Year in Review

Unlike the Internet M&A space, the public software company M&A market was actually fairly robust in 2008 with 33 deals worth over $40BN closing.  That's actually up from 2007 when 28 deals worth $18.5BN closed.  That said, most of the increase has to do with several large, complex deals announced in 2007, including Nokia's purchase of Navteq and TomTom's purchase of Teleatlas, taking almost a year to close, but it remains that despite the terrible market, public software company was actually fairly robust in 2008.

2008 continues the long term trend of increased public software company M&A.  As the graph below makes clear, software M&A has been in a solid uptrend since 2004. 

# of Public Software Company M&A Deals

As outlined initially in a post several years ago on the incredibly shirking software industry there are a number of trends driving increasd M&A in the software space and these trends appear to accelerating.  The total number of public software companies decreased 11.5% in 2008 vs. 11.2% in 2007 and 11.1% in 2006.  Total market cap of the software sector is now $618 BN, down 25% from 12/31/03.  Good lord.

One interesting observation is that this consolidation does not appear to be driven from the "top down".  Despite significant M&A activity on the part of the "Big Four" software companies (Microsoft, IBM, Oracle, and SAP) over the past five years, their share of the software sector's market cap has actually decreased from 70% to 68% over the past 5 years. I wouldn't have believed them if somebody told me this before today, but it's true.  Granted, most of this decrease has to do with a 27% decline in Microsoft's market cap in the last 5 years (16% if you exclude their $3 special dividend).  Of the Big Four only Oracle has seen it's share price and market cap increase in the last 5 years. What this suggests is that consolidation within the software industry is taking place at all levels and that the largest software companies are ultimately not really taking share from the market.   Pretty much counter intuative to conventional wisdom within the software space, but right now that's what the numbers say.

Click on this link for a complete list of all the public company software M&A deals in 2008.

2008 Public Internet M&A: Year In Review

2008 will not be remembered as the "Year of the Deal" in the Internet sector.  In fact, it is a year virtually all companies and investment bankers would prefer to forget.

There were a grand total of 9 public Internet companies acquired in 2008 and the largest of those deals, CBS's acquisition of CNET, was only $1.8 BN, hardly big enough to generate sufficient fees to keep Wallsteet's finest attired in bespoke suits.

The biggest news in the Internet M&A space was, of course, the deal that never happened: MIcrosoft's proposed offer to buy Yahoo!.   In the wake of this failed engagement there may be some big deals in 2009 as both Microsoft and Yahoo pursue other options, but for now 2008 will go down as one of the quietest, perhaps the quietest, years for M&A in the Internet sector ever.

           2008 Acquisitions of Public Internet Companies

Closed	Target		Acquirer		$ Size
1/17/08	Visual Sciences	VSCN	Omniture	OMTR	$394
2/4/08	Traffix	TRFX	New Motion	NWMO	$159
3/18/08	Audible	ADBL	Amazon.com	AMZN	$300
4/16/08	Varsity Group	VSTY	Follett Group		$4
6/30/08	CNET	CNET	CBS	CBS	$1,800
8/6/08	Hostopia	H.TO	Deluxe	DLX	$124
10/15/08	Greenfields Online	SRVY	Microsoft	MSFT	$486
10/30/08	Napster	NAPS	Best Buy	BBY	$121

For a complete list of public Internet M&A deals as well as some private deals see this list of Internet M&A deals.