Pru's Paul Merenbloom: CMGI = a compelling value, price target $216
(Courtesy of redelman on RG's CMGIOT)
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3/10 Pru: CMGI is "GE for the Internet"
multexinvestor.com
EQUITY RESEARCH
CMGI, INC.
MARCH 10, 2000
CMGI: CUTTING THROUGH THE DETAILS - ALL SYSTEMS ARE GO; STOCK
REMAINS HIGHLY UNDERVALUED; CMGI IS ENABLING THE NEXT GENERATION OF THE NET; STRONG BUY
(Part I of II)
Subject: CMGI, Inc. (CMGI?$145 3/8)--OTC
COMPUT
COM EPS OPINION
Current: STRONG BUY
Analyst: Paul L. Merenbloom (212) 778-7328 Prior:
Alan J. Wargaski (212) 778-5039 Risk: HIGH
12-Month Target Price: $216 Market Capitalization:$36.7 bil.
Ind. Div.: - Yield: - Shares: 252.5 mil. 52-Wk.Range: 163 1/2 - 33 1/8
EPS FY Year P/E 1Q 2Q 3Q 4Q
Actual 7/98 $ 0.10 NM $ 0.02 $ (0.04) $ (0.07) $ 0.16
Actual 7/99 $ 2.24 NM $ 0.20 $ 0.07 $ (0.15) $ 2.12
Current 7/00 NM $(0.54)A $ (0.74)A
COMPANY DESCRIPTION: CMGI is an Internet-based marketing, development, and investment organization. Focused on creating traffic and value via Internet related vehicles, CMGI now consists of nearly eighty majority -owned and/or affiliate members. We value CMGI on a sum-of-the-parts basis noting the impracticality of maintaining financial models for each unit. In summary CMGI represents a "basket" of Internet investments.
Key Points:
ú CMGI continues to trade at a discount to par value and represent a compelling investment opportunity.
ú We note that the company?s strong balance sheet, which includes over $3 Billion in cash, cash equivalents and available for sale securities is more than ample to cover near term (next 4 quarter) funding and cash
commitments. We see no reason that CMGI would ?need? to come to the market for additional capital.
ú The company?s investments and initiatives in Asia, Europe and Latin America are already demonstrating strong results. PCCW stock has more than doubled since the September, 1999 investment, noting PCCW?s successful bid to
acquire Hong Kong Telecom from Cable & Wireless, PLC.
ú CMGI continues to innovate and cultivate net value. The company?s new funds, notably the B2B fund, suggest a strong flow of new companies and, in turn, liquidity events. CMGI?s status as an operating company offers
investors far greater leverage and a lower tax bite. The company?s global focus offers diversity. And CMGI?s continuing success in building companies, tools, technologies, and network value are unparalleled.
ú We reiterate our ?Strong Buy? rating on CMGI shares and our $216 price target.
Summary: We can?t help but reiterate our belief that CMGI shares remain fundamentally undervalued at current levels. CMGI closed yesterday at a $36.5 Billion market cap, $23.6 billion in public equity value, and almost $3 billion in available for sale securities and/or cash. $97.71 of the share?s $145 3/8 is comprised of the publicly held securities. This suggests that the entire private portfolio is valued at $12 Billion, or $47.66 per share.
In our opinion, this valuation is just short of absurd. With AltaVista and Furniture.COM both in registration, and the announcement yesterday of an additional six-to-eight more liquidity events, offset by the introduction of
two new companies (being built from the ground up) and commitments to fund over $1.5 billion in near-term (coming 4-6 quarter) investments, we believe the Street is furthering an arbitrage opportunity ? thus presenting investors the opportunity to buy CMGI shares at a significant discount to current market value.?GE
for the Internet?
We urge investors to do the math, and assess for themselves the potential of this stock. We believe CMGI is uniquely positioned as the next-generation ? but with a faster timeline, and an aggressive vision driving the organization.
Again, CMGI?s income statement is nearly meaningless to us. Yes, the conglomerate is driving 20% plus sequential growth in revenues ? a key and important metric, but operating expenses, including a current burn rate of $50
million per month and a continuum of ?one time? realizations of gains from the sale of stock, suggests to us that investors need to evaluate the company?s
growth vis-…-vis value creation, revenue generation, and operating efficiency/effectiveness as measured by the net asset value of the total CMGI portfolio.
On the basis of these metrics, we believe CMGI continues to ?knock the ball out of the park? ? a sentiment reflected by the recent successes of progeny
Navisite (NAVI?$300 15/16, not rated) and Engage Technologies (ENGA?$164 1/2, not rated).
CMGI Has Demonstrated, With Compelling Results That It Is Far More Than Just An Internet Incubator Or ?Eco Net.? Fiscal 2Q, 2000 results, which cover the period ending 31-Jan-2000, add many more illustrations to CMGI?s success,
growth and inertia. While we think Wall Street seems overly caught-up in comparing CMGI to more vertically focused investment funds, there are three key distinctions, in our opinion, that merit attention:
1. We believe CMGI to be the ?GE? of the Internet space. It is a highly diverse, multi-faceted organization that is forward looking and acting on a global basis;
2. We believe CMGI?s leadership possess a unique vision that has proven uncannily accurate, combined with a world-wide presence and unparalleled partnerships with the likes of Compaq, Softbank, PCCW, Intel, Microsoft, and Hicks-Muse. This combination suggests a world-wide feeder and vetting network that serve to increase CMGI?s ROI and ROE (synergy).
3. We believe CMGI is driving the future of the Internet, creating technology services and resources like the WebOS that will help the Net reach it?s full potential.
Moreover, we believe the company has demonstrated their
commitment to quality, taking the ?high road,? as demonstrated by the company?s commitment to maintain consumer and corporate privacy. Since capturing the detail and sorting through the information in the CMGI
release and conference call is akin, in our opinion, to counting the people passing through New York?s Grand Central Station during evening rush-hour, we have attempted to boil the call down to the following key points:
ú CMGI?s majority owned companies are executing exceptionally well. With 24% sequential growth in operating revenue, and a clear signal from the company
for no less than 20% growth in each of the forward quarters, CMGI?s train is about to really start rolling.
ú The company is self funding. Holding nearly $24 billion in marketable securities today, up from $18 billion just 30 days ago, and over $3 billion in currently accessible cash and equivalents, we believe CMGI has a strong
financial base and we see no need for additional external capital infusions;
ú CMGI is global. Not going global - they are there today. There are no other companies we can identify that have leverage even approximate to CMGI?s capabilities, reach, or return potential.
ú It is not fair, nor appropriate to contrast CMGI to Internet Capital Group (ICGE), Divine InterVentures, or any other ?incubator play.?
ú CMGI is the only public company developing infrastructure, B2B, B2C, technology, commerce tools and global markets. We believe CMGI has demonstrated a continued capability to exceed market expectations and is
operating as an operating company. CMGI is working within the bounds of the 1940 Act ? remaining an operating company to provide investors the greatest flexibility and realized returns, in our opinion.
ú CMGI is adding critical mass and, we believe, creating new, net, value at an increasing rate. The company has clearly demonstrated, in our opinion, the ability to reach into new markets, acquire and leverage key assets
(e.g. the Flycast acquisition that, in turn, led to the Engage deal) and not ?drop any balls? along the way.
ú Wetherell is brilliant, in our view - a clear visionary, and has surrounded himself with the people and structures to enable continued growth through exceptional flexibility while keeping enough structure to provide the stability necessary to support the rapid growth.
We reiterate our "STRONG BUY" rating and $216 price target.
Prudential Securities Incorporated makes a primary over-the-counter market in the shares of CMGI, Inc.
Prudential Securities Incorporates and/or its affiliates or its subsidiaries have managed or comanaged a public offering of securities of Bell South. Prudential Securities Incorporated (or one of its affiliates) or their
officers, directors, analysts, or employees may have positions in securities
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