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ARTICLE: CMGI: Under $6, and still not a buy
The question now is whether this Internet incubator -- which traded last year at $160 -- has enough cash to survive until the dot-com and information-technology slumps turn around. Aggressive cost cutting and a reorganization should help.
By Michael Brush
If you've got a contrarian streak as an investor, you might be wondering whether it's time to invest in CMGI Inc. (CMGI, news, msgs), the once highflying Internet incubator. Given that the stock has fallen from more than $160 in January 2000 to around $5.75 a share, it's not hard to think the company looks like a good deal.
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For one thing, the stock trades around the value of its current assets -- which means cash and anything that can be converted to cash quickly. As of late January, CMGI's cash ($1 billion) and stock holdings ($900 million) were worth about $5.50 a share.
That drops to about $2.90 a share if you take out the $865 million worth of securities that cannot be sold right away because of restrictions like lockups. This includes holdings in companies like Engage (ENGA, news, msgs), an online marketing and advertising business; NaviSite (NAVI, news, msgs), a Web hosting company; Pacific Century CyberWorks (PCW, news, msgs), an Asian broadband Internet service provider; and Primedia (PRM, news, msgs), a trade magazine publisher.
On the other hand, the company has been busy cutting staff and closing weak businesses to bring down the rate at which it's burning through cash. CMGI believes that given these efforts, it will still have cash and cash equivalents of $600 million to $700 million by the end of July. And it is confident it has enough cash to stay in business long enough to break even and turn a profit at some point. (The company is projected to lose $7.10 in 2001, according to consensus estimates at I/B/E/S.)
Now, with the Federal Reserve interest rate cuts looking like they may perk up the initial public offering market, CMGI may seem even more attractive. "Internet incubators are a call option on the Internet IPO environment," says Ethan McAfee, an Internet stock analyst with T. Rowe Price. "In an environment where IPOs are very hot, these companies will dramatically outperform. The value of their private portfolio holdings is low right now, but investors will put a higher value on them if the IPO market comes back."
Does all this mean it's to time buy CMGI? Perhaps. But it's probably safer to hold off. Here's why.
Uncertain future
First of all, a few weeks ago the company lowered estimates for the current quarter and simply suspended guidance for the entire year. Given the ongoing restructuring and uncertainty about the Internet space the company serves, it's simply better to wait and see how the turnaround plays out, unless you are a real gambler.
Next, even though growth stocks have come back to life in anticipation of an economic recovery, there is no guarantee the IPO market will revive soon. "We don't think there are any reasons why the Internet IPO market is going to heat up in the next six months," says T. Rowe Price's McAfee. CMGI would argue that the state of the IPO market really does not matter because it makes most of its sales in private transactions. But lots of fund managers make the connection between CMGI and the IPO market -- and they are the ones who set the value of a stock through their buying and selling.
Then there is the tougher question of whether CMGI will really ever be able to bring its businesses back to life and produce profit growth.
Part of the current strategy to turn profitable is an aggressive cost-cutting campaign. CMGI has recently eliminated about 1,000 positions, or around 20% of its work force. There's new management at Engage, which is busy cutting costs, too. AltaVista has reduced its workforce by about 25% as it redirects its efforts to providing search engine services, instead of trying to become a major portal. CMGI has eliminated certain businesses altogether, like the entertainment portal iCast and the dial-up access provider 1stUp.com.
Meanwhile, last September CMGI shifted its own focus to improving the performance of the myriad companies in its portfolio. Those businesses were organized along five lines of business. They are: search and portals (chiefly AltaVista), infrastructure and enabling technologies (NaviSite), interactive marketing (Engage and yesmail.com), e-business and fulfillment (SalesLink and uBid), and Internet consulting services (CMGI Solutions). The company also has a venture capital group, CMGI@Ventures.
Lack of leaders
Some money managers remain skeptical about whether all of this will really help. "They have consolidated down into five operating groups, but I would still say they are not a leader in any of those five groups," says John Faig, an analyst with American Express Financial Advisors. "That strategy flies in the face of what investors look for. General Electric (GE, news, msgs), for example, wants to be No. 1 or 2 in every business in which they compete, or else they exit the business."
The stock performance of several of CMGI's investments underscores this point, Faig says. Engage, for example, has come down from a high last March of over $90 to under $2 now. NaviSite has dropped from $160 to under $4. Other Internet-related businesses and investments like Critical Path (CPTH, news, msgs), Ventro (VNTR, news, msgs) and Vicinity (VCNT, news, msgs) have all taken similar swoons.
Given this track record, Faig wonders whether CMGI is now up to the complex task of managing a diversified collection of companies. "They have a huge portfolio of private and public companies, and highly diversified companies are hard to manage. If you have a management team that has stumbled in the past, being so diversified is probably a liability. With the uncertain economic climate it is very important for investors to pick winners."
Not surprisingly, CMGI disagrees. "CMGI has been very good at identifying up-and-coming trends and investing in them," responds Paul Merenbloom, the head of investor relations for the company. "We got into the consumer-facing marketplace well before the market understood it." CMGI, for example, was an early collaborator with Carnegie Mellon University in the development of Lycos.
And many CMGI success stories, says Merenbloom, have been "grand-slam home runs." He points to examples like ######### (personal Web pages), Half.com (online garage sales) and Netcarta (Web site and server management tools) that were sold for tidy profits to Yahoo! (YHOO, news, msgs), eBay (EBAY, news, msgs) and Microsoft (MSFT, news, msgs). "If you go back and look over CMGI's history in the last five years, you will find that the majority of the working capital came from proceeds of stock received in exchange for companies like these." (Microsoft owns and publishes MSN MoneyCentral.)
Anurag Pandit, the co-portfolio manager of the John Hancock Small Cap Growth Fund (TAEMX), also comes to the defense of CMGI management. "You have to look at their vision, their ability to effect change and the strength of their industry contacts," says Pandit. "I think Chief Executive David Wetherell and his people have all those qualities."
As the Internet goes, so goes CMGI
Assuming you believe that CMGI really does have the talent to produce winners in the Internet space, the company will need to see two developments to have the wind at its back again.
First, look for an end to the dot-com slump. It's no secret there's a cash crunch among many of the surviving dot-com companies, which hurts CMGI because it relies on them as clients. "I would consider investing in CMGI because it is a quality company with good managers," Pandit says. "But I would like to see some of the Internet metrics get better. Ad revenue and the amount of trade being done on the Internet have to increase." It would also help if the capital markets opened up for dot-com companies again.
Next, a bounce back in information technology spending will help. Given CMGI's new focus on Internet infrastructure and e-business fulfillment -- as opposed to business to consumer trade -- bigger capital-expenditure budgets are important. "Once that market cycle resumes and companies feel confident about investing in their own systems, we think there is a phenomenal opportunity for us," Merenbloom says. "It will also help if corporations recognize the value proposition of outsourcing a lot of technology services."
In the near term, keep track of how the turnaround is going and watch for any news on the important cash burn rate. The next point when you are likely to get fresh insights: the company's first-quarter conference call scheduled for March 13.
At the time of publication, Michael Brush neither owned nor controlled shares of any of the companies featured in this article. |
