Rocket Fuel Runs Out of Gas

 | May 09, 2014 | 1:31 PM EDT
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They are all different and they are all the same. I'm talking about the incredible shrinking e-commerce plays that came public to much fanfare and are now just purveyors of pure heartache to those who own their shares. The destruction in this segment of the stock market seems to be an almost weekly occurrence and it is spreading fear throughout everything Internet-related.

Today it's Rocket Fuel's (FUEL) turn to blow up. Here's an Internet commerce company that helps figure out how to place ads on the Web to get the biggest bang for the buck. It's part of a cohort of e-commerce plays that includes ChannelAdvisor (ECOM), Millennial Media (MM) and the Rubicon Project (RUBI). All these names have racked up gigantic losses for shareholders so far this year.

Run by George John, an actual rocket scientist and tech genius, Rocket Fuel optimizes the ads of companies trying to wind their way through the new systems that match ads to readers. The company is no stranger to Mad Money as I have had it on twice, mostly for informational purposes because I, too, have been very worried about this segment, in part because its forerunners, companies that helped design Web advertisements for Internet 1.0, were at the forefront of capital annihilation the last go around in 2000.

Rocket Fuel came public to much fanfare at $29 in September 2013, and immediately went to a 93% premium to close at $56. It hung up there, trading all the way up to $66 in January when it revealed terrific revenue growth and filed a follow-on offering of 5 million shares, 3 million of it from insiders including George John. The deal printed at $61 per share, not far from the high. It's been downhill ever since, with the stock losing more than 25% today to trade at $20.

What did Rocket Fuel do wrong? After reporting a quarter with sales growth of 95%, it announced that it would see growth slowing to between 62% and 69%. The losses would remain steep. The prospects for a profit would be far in the horizon.

There was a time when the market would have actually accepted this slowdown. Not anymore. A downgrade, Buy to Hold, from Goldman Sachs this morning was a big blow.

The decimation in this cohort is nothing short of unbelievable. ChannelAdvisor, which provides ecommerce advice for retailers, is now down 47% for the year after reporting a quarter with "only" 30% revenue growth. MillennialMedia, which provides mobile advertising solutions, is off 52% for the year after missing multiple projections and experiencing tumultuous management turnover. The Rubicon Project, another aider and abettor of Internet commerce, came public at $15 during the IPO-heavy week of April 2, rallied to $17 on the day and then proceeded to $22 20 days later before crashing down to terra firma at $12 -- if that is terra firma as we haven't seen an earnings report yet. That comes next week.

What's going on with this segment? I think there's so much competition, so much bloodletting, and so many well-capitalized companies that it may have been inevitable just as it was in 2000. It's just that the speed with which the denouement happened is breathtaking.

What will the future bring for these companies now? I suspect there will be a ton of mergers and maybe some failures as the shakeout proceeds apace. Suffice it to say, if the 2000 pattern plays out to its fullest, these stocks will remain toxic to both growth investors and value investors alike until they trade through their cash and stop losing money.

Until then, just rubberneck. It's not worth it to be a Good Samaritan. There may be nothing left to save.

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