The Coming Year: Internet Stocks Try to Find More Winning Ways
By Jeffrey L. Newman
Senior Editor
1/6/98 10:54 AM ET
After lots of hype and a little black ink in 1997, it looks like 1998 will test the mettle of all those big-dream Internet companies.
Stocks of 1997's leading Internet companies -- such as Yahoo! (YHOO:Nasdaq), America Online (AOL:NYSE), Amazon.com (AMZN:Nasdaq) and @Home (ATHM:Nasdaq) -- are trading close to their 52-week highs and showing no sign of weakness moving into 1998. Analysts say they will likely be this year's darlings, too.
But few others did well in 1997. The rest of the stocks in the sector -- Excite (XCIT:Nasdaq), Infoseek (SEEK:Nasdaq), Netscape (NSCP:Nasdaq), PISNet (PSIX:Nasdaq), OnSale (ONSL:Nasdaq), Checkpoint (CKP:NYSE) and Security Dynamics Technologies (SDTI:Nasdaq) -- were volatile or down.
The phenomenal growth experienced by the leading stocks last year is set to slow significantly in 1998, analysts say. For the year, AOL was up more than 172%, closing at 90 1/2; Amazon.com was up 235%, closing 1997 at 60 1/4; and Yahoo! jumped 511% to close at 69 1/4. Analyst Henry Blodget of Oppenheimer says these stocks are likely to grow on the more mortal order of 30% to 50% this year.
Andrea Williams, Internet analyst with Volpe Brown Whelan, says stocks of companies like Excite and Lycos (LCOS:Nasdaq), which are emerging to be information aggregators rather than just the search engines they started out as, have real potential this year. However, she thinks Yahoo! is too pricey.
Cowen recently upgraded Excite to a buy; Credit Suisse First Boston, Wessels, Arnold, Henderson and Adams, Harkness also upgraded Yahoo! recently.
Blodget says Excite is a good buy at current levels compared with Yahoo!. The stock is trading at only six times next year's estimated revenues, as opposed to Yahoo!, which is trading at 35 times next year's estimated revenues. While Excite is not making money yet, it expects to turn a profit in the third quarter of 1998.
The IPO arena saw several spurts of enthusiasm by investors wanting to get in on the Internet bandwagon in 1997. N2K (NTKI:Nasdaq), an online music site, popped at 24 in mid-October, well above its pre-opening price, but has since dipped back to the low teens. Real Networks (RNWK:Nasdaq), a leading provider of streaming media products and services over the Internet, shot up to 19 on its opening day in November, several points above its pre-opening price, but is now trading in the low teens.
And OnSale, the online auction house, which shot up from its single-digit opening in April to 35 in August after signing a deal with America Online, retreated back to the mid-teens in November after investor enthusiasm waned. It's currently trading in the 17-18 area.
Electronic commerce was a mixed bag, too. With the exception of Amazon.com, the sector was filled with many ups and downs, as investors tried to evaluate how to play this area.
The winner here could be OnSale. Blodget says the online auctioneer is one of the top equities to watch in 1998, as it is "now discounted for five years of exceptional performance," he says. "It's now at levels that are looking good again. As soon as it can establish itself as the clear leader in that area, it will shoot way up again."
For 1998, areas to watch include the music delivery sector and the security arena.
With the availability of greater bandwidth and the growing popularity of digital video disc technology, music delivery will be one of the hottest Internet sectors. So far, only N2K and Real Networks have emerged in this area. An IPO slated for the first quarter, CD Now, could prove to be a winner here.
"Whoever can get the momentum behind them will win huge in 1998," says PaineWebber analyst James Preissler of the music sector.
Preissler says security is hot because of consumer awareness and concern as online commerce grows. While CheckPoint and Security Dynamics are current leaders, several smaller companies could emerge, including Secure Computing (SCUR:Nasdaq), Cyberguard (CYBG:Nasdaq), Trusted Information Systems (TISX:Nasdaq) and Raptor Systems (RAPT:Nasdaq), which is planning to merge with Axent Technologies (AXNT:Nasdaq).
Of course, investors can always follow the advice of Stuart Francis, an Internet analyst with Lehman Brothers, who says playing the leaders in each of the various Internet categories is the safest way to win in this volatile sector. Analysts say these include America Online for online media, Yahoo! and Excite for content and navigation, E-Trade (EGRP:Nasdaq) for online trading, OnSale and Amazon.com for commerce, Security Dynamics for Web technology and N2K for online music retail. |
