Another Dotcom Bust Payout

By Dr. Duru written for One-Twenty

November 12, 2006


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Last year, I became $24.45 happier as I got a well-deserved payout from the misery I suffered investing in Lucent's stock near its tech bubble top. A few weeks ago, I received even more good news. I earned a $9.50 distribution from the misery I suffered believing in the revolutionary supply chain technology of i2 (ITWO). I guess I should also take solace that I was one of the "small" losers in the financial shenanigans that happened behind the scenes at ITWO. The lawyers in this case processed 70,000 Proof of Claim forms with accepted claims exceeding $3.4 billion. Yep. That's BILLION! Of these claims, the settlement produced $76 million in restitution. So, clearly, my pain was a drop in the bucket.

Now, a little background on the ITWO drama. Back in March, 2003 the official announcement came of a formal SEC investigation into ITWO's shady accounting. The stock was under $1 (before the reverse split) and all but dead. The stock was delisted soon after that, and I assumed that ITWO was on its way to bankruptcy. Another shameful mark on the gloomy statistics of the dotcom bust of 2000. Somehow, ITWO wrangled its way back to life, inclduing a wholesale change in management. ITWO even got some encouraging words from analysts as the stock sankthroughout all of 2004. ITWO's stock finally hit bottom in May, 2005. CIBC upgraded ITWO from underperform to sector perform and reassured the market: ITWO's results "...showed evidence that a recent restructuring has taken hold, resulting in expenses falling well below revenue for first time in years. With the debt gap almost closed and expenses in-line...the worst appears to be behind ITWO." The market instantly jumped on the feelgood train and before the buying was over, ITWO closed July 29, 2005 up a whopping 65%. Ouch for the shorts betting that ITWO's return would generate more of the same pain as always. Since then, the company and the stock have not made much progress. After the very next quarterly earnings report, ITWO's stock was crushed for a 34% loss and the stock was right back where it started before the July earnings report. So much for confidence in the turn-around. ITWO missed on earnings and revenue estimates, and apparently analysts were chomping at the bit to find out when the company would get cash flow positive. To me, this all sounded like more of the same. During the tech bubble, I think ITWO turned in much more in losses than profits. I would bet they were rarely even cash flow positive and instead lived off the largesse of their over-inflated stock.

Now, ITWO's stock is sitting roughly where it was when the SEC launched its formal investigation (after adjusting for the reverse split). The copmany is reporting profits, but the market is clearly wary. Forward P/E is "only" 15 and the price/sales ratio is an amazingly low 1.28, both relatively low for the premiums software companies usually get. Dare I say that ITWO could be a buy assuming that its business is finally legit? I dare not for now! But for those brave enough to look for "hidden values," I think ITWO is a name to keep tabs on. If for no other reason than to try to catch the next wave when ITWO's business model becomes fashionable again.

Be careful out there!
© DrDuru, 2006