Unwary investors got burned when the bubble burst at high-flying iPix

By DAVID MOON, Moon Capital Management
April 8, 2001

When asked why a high-tech company like IPIX would locate in east Tennessee rather than a more tech-friendly place like California, IPIX CEO Jim Phillips responds he envisions Knoxville as 'Silicon Holler,' sort of a Silicon Valley, but with Dolly Parton and grits. To even mention Knoxville in the same breath as parts of the traditional tech world seemed, at best, a stretch. In hindsight, it was prophetic.

In little more than a year, the price of IPIX stock has fallen from more than 40 to less than one dollar per share. In conservative, stoic, 'let's-celebrate-the-misfortunes-of-others' east Tennessee, IPIX is one of our most high-profile Internet-related companies. When we think local and Internet, we think IPIX. The company is our own local metaphor for an entire industry.

Imagine, if 80 to 90 percent of your potential customers suddenly disappeared. How would that change your business model? IPIX is not only an Internet-related business, so are its customers ' most of whom no longer exist. After a year of non-existent venture capital interest and massive industry layoffs, it is almost a success if an Internet company is still operating. That fact is lost on many of us in east Tennessee, because our universe of local visible Internet companies is so small. We don't see the increased office space vacancies and declining rents and home values of the more tech-dependent Silicon Valley.

IPIX is an interesting study because of the rapidly changing rules within the sector and investor sentiment. Eighteen months ago, analysts and many professional investors encouraged these companies to ignore earnings and focus on investment metrics like revenues and market share; worry about earnings later. The key was to be the first and biggest. Almost overnight last March, someone woke up and decreed that Internet companies should have earnings, too. It caught the investors and company executives of an entire industry by surprise. And with the hindsight of a few months, it was evident the rules were dramatically changed. Today it is clear. The landscape is littered with the carcasses of companies with no products, no technology and no chance to ever generate any earnings. Many of these companies were potential or actual IPIX customers. Tough industry. Silicon Valley is in a virtual depression; all we have is IPIX ' still in business and selling a real technology, but to a vastly smaller potential market.

What are the lessons for investors? Before committing capital to any investment, we always ask the question, 'what is the worst thing that could happen if we buy this stock and what would cause it to happen?' That question was completely ignored by a slew of tech investors who, instead, asked the question: 'how much money can I make on this deal?' They never considered that they might actually lose money.

Investors should also consider their area of competence and stay within it. At Moon Capital Management, we have a rule we apply to every investment we consider: the Sien rule. Sien is my wife. She spends her days caring for our two ninth-month old kids. It's hard work, but doesn't generate a W-2. If a company makes less money than Sien, we don't buy it. That's the Sien rule. It causes us to miss a lot of stocks that go from 2 to 100 dollars a share. But it also causes us to miss all of the stocks that go from 100 dollars to 2. Some people can properly analyze and value an industry that is not focused on earnings; some cannot. Make sure you know which you are.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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