Stick to the Facts
The game being played by USWEB is bold and decisive. If you don't like to see the cook at work get the heck out of the kitchen! This company is positioning itself to become a major player in a huge new market, (((E-COMMERCE))). This market will place heavy demands on companies like USWEB and CKS to deliver full featured websites that can deliver on the promise of mass E-Commerce.
New emerging technologies like XDSL, and cable modems, to the home will give the average user 384kbps to 1mbs access to the internet at a cost of $29-$39 a month. This kind of throughput will allow users to experience the Internet in ways they never dreamed of. Imagine downloading music, video, software etc. Imagine E-commerce that allows the user to see any product from any angle quickly and efficiently without network delay. Imaginge realtime gaming sites that allow for 3D gameplay like never before. The list goes on and on.
The point is this; USWEB with CKS are boldly preparing for this huge opportunity in a very respectable and resonable manner. It will come down to wether or not they can execute on this plan. If they do, they can become the modern day EDS, SAIC, etc., and quite frankly that would not be fine with me.
Sectors & Trends
4 real winners of the Internet gold rush
Cambridge Technology, CKS, USWeb and Think New Ideas are mining for online riches by handling Web sites for big clients.
By Mark Thompson
During the California Gold Rush in the 19th century, the biggest long-term winners were companies selling goods and services to all those miners rushing to find the glittery stuff.
Today's analog to those pickaxe, tent and jeans salesmen are the Internet commerce service providers -- the folks strategizing, coordinating and implementing the Web dreams of the world's big retailers, wholesalers and media hawkers.
Cambridge Technology Partners (CATP), USWeb Corp. (USWB), CKS Group Inc. (CKSG) and Think New Ideas Inc. (THNK) are four of the leading vendors of the expertise needed to create, position and maintain intranets and Web sites -- the indispensable tools of the Internet gold rush. Each is well positioned to slice off more than its share of the $13.6 billion that Ullas Naik, an analyst at brokerage First Albany, expects businesses to spend on Web-based services by 2000.
Companies like Wal-Mart Stores (WMT) and Time Warner Inc. (TWX) that are laying out that kind of money have visions of cashing in on a projected surge in commercial activity on the Internet. According to International Data Corp.'s Web Usage Trends Report, consumers will spend $54 billion on the Web by 2002 -- up from $4.3 billion this year. By Forrester Research's estimate, business-to-business transactions will swell from $5.6 billion to $327 billion in the same time span.
Over the next several years, all four stocks are expected to move to steadily higher ground as investors come to recognize the value of their business plans.
But whether individual companies succeed or fail in achieving their Internet dreams, the firms that outfitted them for their forays into the Web-commerce gold fields will have already pocketed their pay.
A taste of volatility
That's not to say the Web commerce facilitators won't suffer in any waves of disappointment that could overtake Internet stocks. Indeed, most of the leading Web-commerce service companies have already gotten a strong taste of volatility.
Think New Ideas, a brand-promotion firm with clients such as Coca-Cola Co. (KO) and Chrysler Corp. (C), rocketed from below $10 a share to nearly $40, then plunged into the teens before climbing back to nearly $30 -- all in the last five months.
CKS Group, a marketing firm for Apple Computer (AAPL) Levi Strauss and others, nose-dived 60% in two days last November, and has bounced back to barely more than a third of its 52-week high.
USWeb, a globe-spanning Web design firm, went public at about $10 last December, soared to nearly $40 by April and is now nearly 40% below that peak.
Cambridge Technology, a software and network consulting firm, is a paragon of stability. Its stock recently reached a new all-time high after a snappy recovery from a 20% slump early in the summer.
Over the next several years, all four stocks are expected to move to steadily higher ground as investors come to recognize the value of their business plans, say analysts who follow the sector.
"Recently the stocks have traded with the search engines, which is rather strange because they are Internet technology services companies," says Nat Schindler, an analyst at Volpe Brown Whelan & Co. He makes a subtle but critical distinction between these service providers and their customers: "They sell services, not products. And their value is pretty easy to get to based on earnings, not revenue."
Those Internet content makers like Yahoo! (YHOO) and Excite (XCIT) have seen soaring market valuations despite having no earnings because their brands are better known to Wall Street. Here' a closer look at the back-office commerce folks whose values are a lot more down to earth.
Cambridge Technology
Cambridge Technology is the most solid and profitable of all the companies engaged in building Web sites and businesses for large corporate clients. Based in Cambridge, Mass., the company has a market capitalization of more than $3 billion and will bag net income of more than $50 million this year on more than half a billion dollars in sales.
Most of that revenue comes from non-Internet client/server consulting and implementation. But new media projects account for 30% of revenue and 50% of new projects, says Hugh Shytle, an analyst at Cowen & Co. in Boston. "There's a sense of sustainability there that I find real attractive," adds Shytle, who projects that the will grow 50% a year.
He has a 12-month price target of $70 on the stock, now trading in the high $50s, and rates it a "strong buy." Nine of the eighteen other analysts who cover the company second that rating while seven rate it a "moderate buy."
Institutional investors, who hold about 60% of Cambridge stock, have recently raised their stake, even while insiders have been selling at a steady pace. Never mind that, says Shytle. Insiders shed lots of shares last year yet the stock is up 70% so far this year.
USWeb
USWeb derives almost all of its sales from Internet services. The company lost nearly half its value after warning in April that it expects to incur "substantial operating losses through at least 1998." But the three analysts who cover the stock and rate it a "moderate buy" have a ready explanation: The company has piled up non-cash charges while rolling up 25 smaller Web design shops in the past 15 months.
While the company won't record net earnings before 2000, USWeb should be operating-cash-flow positive by the final quarter of this year, analysts predict.
In the meantime, USWeb, which now has 37 branch offices, is "investing aggressively in their brand, going after scale. In this industry, that's very important," says Steve Sigmond, of Dain Rauscher Wessels. "Investors are looking for critical mass and USWeb has the scale to be a really big company in three to five years."
The company's customers include 22 of the Fortune 100 companies, says Kelly Schwager, a USWeb spokeswoman. A recent contract with NBC is "a good indication of this company moving up the food chain," adds Sigmond, who says he's aware of several other major deals in the pipeline.
Naik, of First Albany, expects the stock now trading around $24 to reach $40 -- just beyond its 52-week high and four times its IPO price -- within a year.
CKS Group
CKS Group is an 11-year-old firm that has added Internet expertise to its menu of more traditional brand-promotion services. But the new-media business, which accounts for 26% of sales, has helped push five-year projected earnings growth rates to 33%, exceeding the company's price-earnings ratio of less than 30 times 1998 earnings.
The company's management put the stock on a fire-sale last November with a warning that earnings would be far lower than expected for the foreseeable future. Six of the company's top 10 clients, who accounted for a dangerously high 50% of revenue, all decreased their spending with CKS virtually at the same time, says James Dougherty, of Prudential Securities, who still rates the stock a "moderate buy."
CKS is diversifying its client base, but until it completes that process, the stock may not move much, adds Rita Spitz, an analyst with William Blair & Co., who also rates the stock a "buy." For a company with more than $140 million in revenue over the past year, $35 million of it from the Internet, and real earnings to boot, the stock is certainly cheap. That's why three of seven analysts rate it a "strong buy" and two rate it a "moderate buy."
Think New Ideas
Think, which like CKS specializes in brand promotion, has far heavier involvement with the Internet -- and the market valuation and volatility to show for it. Never mind that: All six of its analysts rate it a "strong buy" in the expectation that it will gallop out of the red. The expected 10-cents-per-share earnings this year should rise to 69 cents per share by next year, according to the consensus estimate of analysts.
The stock's June plunge came on signs of apparent turmoil including an accountant's report that mentioned such things as "unfilled accounts receivable." But the bulls see nothing alarming in that. High accounts receivable are par for the course in ad firms, which pass enormous media costs through to their clients.
The company's elite client base -- including Oracle (ORCL), IBM (IBM) and the Turner Broadcasting unit of Time Warner (TWX) -- indicate that Think is in a position to thrive on the Web commerce gold rush. Schindler, of Volpe Brown, thinks the stock, now in the mid-$20s, could hit $47 in 12 to 18 months.
Buying opportunity?
Being closely tied to the Internet will be a boon for the Web commerce facilitators in the long run. But in the short term, it could be a curse if the investment bubble pops in high-flying Internet media companies.
"I think there might be some risk for the Web commerce companies because the entire tech section will get hit at that time," acknowledges Naik. "But other than that, fundamentally these are not Internet companies. It just so happens they specialize in the use of Internet technologies. But fundamentally they're professional services companies and should be recognized as such."
Naik concludes: "If they do get hit, I don't think they'll get hit much, but if they do, I would just read that as a buying opportunity."
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