Why Doesn't Web.com Just Raise Prices? (WWWW)

| About: Web.com Group, (WEB)

Yesterday, Web.com (WWWW) announced results for their first quarter which were pretty much in line with my expectations.

As is the case now with the vast majority of public companies, the financial numbers are completely confusing, due to charges related to stock options. The company claims to have had positive income after adjusting for stock option expenses, but in looking at the the company's balance sheet (i.e. actual cash position), it appears as if the company burned through a bit of cash this quarter. However, the amount of cash burn is clearly insignificant, and I would say that the minimal cash burn is a great accomplishment for the new management team at Web.com, given the prior history of the company (formerly Interland).

Overall, I am still very positive on Web.com (WWWW) and I think that the new management team is making a lot of progress in getting the company to sustained profitability. As such, I am holding on to my shares, since it seems clear to me that the company can easily reach cash-flow positive territory both on the income and cash-flow statement later this year and/or in 2007. Given the fixed-cost nature of their business, a slight uptick in revenues for Web.com will have a dramatic effect on the bottom-line for years to come.

The only thing that bothers me about the company, as an investor, is that the new management team seems intent on growing revenues via accelerated subscription growth at lower average selling prices. In some cases, I would agree that a "volume" strategy is a good one, but in the case of Web.com, I'd have to disagree. I believe that by pursuing the high-volume, lower-priced consumer web hosting market, the company is pitting itself against competitors that are better capitalized and have much stronger brand recognition (e.g. Typepad, GoDaddy, Yahoo! etc.).

Management, of course, clearly feels that they can capture market share in the lower-priced hosting market, but the question is at what cost? And it's not just a matter of cash costs, but of opportunity costs. If the brightest people at the company are chasing a highly competitive market in which Web.com has little differentiation then they will not have the time or energy to snap up the easier financial opportunities available in the small business hosting market. And there are many!

In fact, it is puzzling to me why the management team just doesn't pursue the easiest opportunity available right now to increase revenues: raise prices! Of course, the stock answer is that you can't raise prices in the small business hosting market. But I've got news for you: you can and many companies are starting to do it for reasons related to other aspects of the hosting market (i.e. increasing prices for bandwith).

If you need proof: Just last month, my e-commerce hosting company raised monthly fees by over 30%. So did I switch hosting providers? No I did not. The reason is simple: The prices are still very low relative to other web business costs (i.e. the costs are easy to absorb) and more importantly it's a real pain to start switching hosts despite the fact that I'm pretty savvy when it comes to technology.

My general feeling is that if Web.com raised average monthly fees by only about 10% to let's say $27.50 from $25 (just an example, I don't quite remember their average hosting fees, though I think they are in this range), not one customer would leave and the company would report a huge uptick in profits sending the stock up significantly. This seems to me to be the best strategy for the company right now. It entails little risk and absolutely no additional investments. Hopefully, the company will consider this plan of action, instead of just focusing on growing lower revenue subscriptions. Paradoxically, by raising prices and showing strong profit growth, the company´s stock price would increase dramatically giving Web.com a strong currency to pursue the low-priced consumer hosting market.

There are of course, other ways to increase average revenues per subscriber, that I have not mentioned here, but in sum, it is my feeling that Web.com (WWWW) is significantly undervalued precisely because it has a huge customer base which can be mined for higher revenue, and not, as management currently implies, because it has the resources to tackle new and competitive hosting markets which entail lower revenues per customer. It would just take a simple decision on the part of management to pursue this internal avenue of growth and a lot of addtional value would be unlocked at the company.

Please Note: We first recommended Web.com (WWWW) at $3.25, and still hold a position in the stock. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.