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 |   Mon Dec 20, 1999
Tracker 1999-40: Meteor - Catching the backflip.com tailwind
Publisher: Kaiser Bottom-Fishing Report
Author: Copyright 1999 John A Kaiser
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| | Kaiser Bottom-Fish Tracker 99-040
Copyright 1999 John A Kaiser
December 19, 1999
Meteor Technologies Inc (MMI-V: $0.40)
Tel #: (604) 682-7076
Catching the backflip.com tailwind
Synopsis: Meteor Technologies Inc (MMI-V: $0.40) came to life last Wednesday and more than doubled to $0.40 on three day volume of 930,000 shares. Many readers have called to ask why Meteor has broken out, and if they should buy more. Let me first explain why Meteor has come alive and why this is probably the beginning of a huge speculation cycle. The breakout appears to have been triggered by the unveiling of backflip.com, a "steath" project founded by a couple of former Netscape executives who have received high powered Silicon Valley venture capital financing. The buzz started last June when Tim Hickman and Chris Misner touted their secret project as "a consumer Web service that will greatly improve the way users interact with the Web". When backflip.com was unveiled on November 29 it was accompanied by a media blitz that produced feature articles in a number of high profile technology forums. In last week's Bottom-Fish Action I mentioned one of these articles that appeared in my local newspaper, a reprint of a San Jose Mercury News column by Internet watcher David Plotnikoff. I strongly suggest that my readers visit backflip.com's web site and check out the many articles posted by backflip.com, including a recent audio piece by Tim Hickman. The URL is www.backflip.com/company/out_news_index.html. The best article is one by Forbes' called "Will BackFlip Flop?" published December 10. The action in Meteor appears to have been generated by investors who picked up on the backflip.com buzz about Internet bookmark chaos and who happened to be familiar with the Thoughtshare project in which Meteor has acquired a 35% stake.
Backflip.com legitimizes the Thoughtshare story
Although the Thoughtshare concept caught my imagination instantly last June when it was presented to me, to the degree that Thoughtshare management freaked out over how close my independently generated "ideas" came to their own "stealth" business plan, the majority of people have failed to comprehend the implications of the concept. Many of my readers, especially those who soaked up much of the 3.5 million shares that traded between $0.17-$.25 in the days following my June 28 Tracker 99-019 in which I first recommended Meteor at $0.15, have understood the story, but have had to cool their heels while Meteor plodded through the deal approval process. In Tracker 99-037, issued on October 21 after I had viewed the proof of concept prototype, I suggested that the next stage was a merger between Meteor and Thoughtshare that could result in a tripling of the capitalization and would likely be accompanied by a rollback as bad as 5:1. That was the scenario being bandied about at the time by the managements of Meteor and Thoughtshare, and it was conditional on attracting a substantial financial backer. Two months ago the mood for Canadian juniors and the Internet was pretty sour, and I suggested that chasing the stock higher at pre-rollback prices in the absence of a firm financing and merger deal would do more harm than good. But in the past month the mood regarding Canadian technology juniors has improved sharply thanks to a combination of the CDNX merger and a roaring NASDAQ technology sector. The Canadian technology cup has gone from half-empty to half-full. The bookmarking media hype created by backflip.com, which is rumoured to have an IPO in the works that might see the light of day by the second quarter of 2000, has created a new legitimacy for Thoughtshare. All of a sudden brokers and investors who yesterday couldn't be bothered to think their way through the Thoughtshare concept smell an opportunity to jump onto a next generation Internet bandwagon. To be blunt, backflip.com is a simplistic approach that Thoughtshare.com will eclipse once it delivers a commercial prototype. I am told that money to pay for programming, and not rocket science, is all that is needed to finish the job. Thoughtshare has recently completed a new business plan, and I am told it goes beyond the business models I spelled out in Tracker 99-037. If you want to understand why people are buying Meteor, reread Tracker 99-037 in the context that Silicon Valley is now thinking very hard about the same topic and that the Thoughtshare team has its game plan figured out.
What is backflip.com?
Backflip.com has created a destination site on which an Internet surfer can store his bookmarks by clicking a "backflip" button installed on his browser tool bar through a backflip browser plugin. "Backflipping" a web page allows the user to assign a brief description and classification to the page. The backflip.com site stores this information along with key words embedded in the page. Through intelligent software backflip.com crunches this information about bookmarked pages to develop classification rules unique to the user. These "rules" in turn become the basis for offering the user the opportunity to let backflip.com assign a classification the next time a user "backflips" a web page. Over time a person ends up with the equivalent of a personalized Yahoo directory without having to break his brain every time he bookmarks a site. The service is free, but the price paid by a user is his privacy. The so-called "click stream" of a web surfer's travels on the Internet represents valuable marketing information, especially if the "clicks" are pages the surfer has troubled to bookmark. Backflip.com is very much conscious of the controversial privacy issue and has pledged that it will not sell the information about a person's "click stream" to third parties, but it makes no bones about the fact that its revenue model is based on using this information to target users of the service with advertising. In my view backflip.com underestimates the privacy issue, which cannot be shooed away with promises about privacy respect. The privacy issue is such a powerful juggernaut that at the end of the day people will be able to surf the Internet with absolute anonymity and will not for a second tolerate any system that requires this anonymity to be compromised.
Thoughtshare versus Backflip or freedom versus enslavement
Thoughtshare goes beyond backflip.com in that its "knowledge objects", or "tours" as I called them and which apparently have been renamed as "ThoughtMaps", are portable. A ThoughtMap can exist as a file you can email as an attachment to anybody. As such it can form part of any document posted to the Internet. Access to a ThoughtMap can be unrestricted or password controlled. Whereas backflip.com hoards everybody's personalized "Yahoo" directories on its mega site, ThoughtMaps will zing around the Internet freely. Users will store their ThoughtMap directories on their own computers, or Thoughtserve parkades that Internet Access Providers or other web sites will purchase from Thoughtshare and offer their members. Backflip.com as a mega site host belongs to the "control freak" genre of Internet functions. You want it? Gotta give your soul to backflip.com! Thoughtshare appeals to the individualism of Internet users. Backflip.com offers a blackbox solution to your problem of organizing your Internet bookmarks, but Thoughtshare provides a visual means of mapping out the log of your Internet surfing session and an interactive means of reorganizing that session by deleting dud destinations, re-arranging the sequence, and annotating pages with comments. On top of that, you can share your Thoughtmap with anybody, who in turn can send it back in a modified and enhanced form. The ability to tour the ThoughtMap again and again in live sessions allows for its refinement into a very sophisticated knowledge object. There is nothing special about the management of this knowledge object in classification terms. But there is something very special about the CZWeb and WayMarking technologies respectively invented by John Dill's SFU team and Steven Forth's DNA Media team that underlie Thoughtshare. My biggest concern from day one has been that a competitor with deeper pockets and bigger marketing clout will duplicate the Thoughtshare concept, so I regularly ask the Thoughtshare insiders if they have detected any serious competition for the Thoughtshare technology. Admittedly their response carries the risk of bias, but I have a fair amount of confidence when chief scientist John Dill and chief technical officer George Myers tell me that they have yet to see anything that comes close to Thoughtshare. I trust them because they follow up every lead regarding potential competition sent their way, and believe me, there is a small army of Meteor shareholders who are so excited about the extraordinary potential of Thoughtshare that they anxiously forward everything that might threaten that optimism. However, they do caution that only a fool would ignore the danger that an underground research project just like Thoughtshare could be cooking up a similar and possibly superior solution. As far as copycats are concerned, both Dill and Myers insist it would take an outsider a year to reverse engineer the scientific algorithms underlying Thoughshare.
Meteor as 35% incubator, majority shareholder or merger vehicle?
The issue of a parallel underground project brings me to the most important issue for Thoughtshare today, which is arranging financing to complete development of the commercial prototype and market Thoughtshare. Backflip.com has competitors that also offer online bookmark storage facilities, and they will be scrambling to get an edge on each other. Thoughtshare doesn't enter the arena until it has a commercial prototype that can begin self-replicating on the Internet. We are still looking at the second quarter of 2000 for a commercial launch, but to get there Thoughtshare will need to raise several more million dollars quickly. Meteor has the right to match any funding proposal to maintain its 35% share. The question now facing the Thoughtshare founders is whether to merge with Meteor now and rely exclusively on the public company to finance Thoughtshare's development, rely on Meteor for another round of financing that increases Meteor's stake in Thoughtshare, or secure financing from other sources such as venture capitalists. The downside of the latter choice is that in the current market environment Meteor can easily raise its 35% share of any new funding, which means that the founders will have to dilute their stake to make room for new investors. There have been rumours on the Internet, particularly Silicon Investor where the Meteor thread is starting to draw new contributors, that a merger is imminent. I would suggest that readers discount these rumours. A merger deal would involve a regulatory approval process that would likely get in the way of the financing process. Because quick and substantial financing is essential to the success of the project, I expect Thoughtshare to defer a merger and instead concentrate on getting additional financing. Naturally I would like to see Meteor exclusively provide the next round of financing and perhaps end up with a majority stake in Thoughtshare. The market would embrace such a move very positively. But I think the most conservative approach for bottom-fishers to take is to view Meteor as an incubator which will end up with no less than 35%. The market seems to like the incubator story in other juniors like Jordex and Martlet, and certainly has a respectable model in the form of CMGI. Right now Meteor is developing into a momentum play driven by the Thoughtshare potential. But that momentum could be harnessed to finance Meteor well in excess of Thoughtshare's immediate financing needs. This would open the way for Meteor to invest in other intriguing startups. In short, don't count on a bigger stake in Thoughtshare as essential to maintaining the momentum of Meteor's speculation cycle. I have heard that some very important meetings will take place this week that could change the complexion of the play in ways that will force a much broader segment of the market to pay attention. I am holding my breath.
One last obstacle and then its infinity and beyond
From a technical standpoint Meteor's chart is showing a rocket launch breakout typical of technology plays. The stock's all-time high of $0.59 was achieved in early 1998 on fairly light volume at a time when the market had high hopes for the Alberta diamond play. Most of the unhappy Alberta diamond paper has been digested by the market since late June as 11.6 million shares changed hands in a range of $0.15-$0.30. Meteor has been a weak company from day one, so nobody bought the paper hoping for a quick flip. The Thoughtshare story was also a difficult one to understand, and anybody who did understand it likely bought with the dream vision in mind and is not likely to be in a hurry to sell. In fact, if the questions I have received are at all representative, the inclination seems to be to buy more shares now that the story is starting to get broader circulation. There is not much resistance left and the stock has the potential to go into orbit if new money tries to get a position. The next source of liquidity will be 1,335,000 warrants exercisable at $0.60 that expire on January 4, 2000. A week ago I had forgotten about these warrants. Getting them exercised today suddenly looks like a piece of cake. Isn't it amazing what Silicon Valley hype can accomplish these days? By the time backflip.com goes public it will have a market cap worth several hundred million dollars. Based on 21.3 million shares fully diluted and a 35% net stake, Meteor at $0.40 is pricing Thoughtshare.com at only $25 million, or $17 million in the Internet currency of US dollars. What I love about the Thoughtshare story is that if Thoughtshare delivers a prototype that does everything management says it will, it will either blow away the competition, or get swallowed up awful damn quick. Backflip.com needs Thoughtshare a lot more than Thoughtshare needs backflip. The same can be said for the search engines, as well as the browser biggies, Microsoft and America OnLine.
*John Kaiser owns more than 50,000 shares of Meteor |
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