December 24, 1998 Networkers Get Swept Up
In the Mania for Net Stocks
By LISA BRANSTEN
THE WALL STREET JOURNAL INTERACTIVE EDITION
SAN FRANCISCO -- If investors are valuing
companies like Yahoo! and Amazon.com at $23
billion and $17 billion, respectively, then doesn't it
only make sense that companies building the
infrastructure allowing those companies to grow
should be worth as much -- or more?
Such thoughts appeared to be crossing investors'
minds this week as networking companies sipped
from the gusher of Internet enthusiasm that has
been driving the stars of Internet commerce and
content heavenward.
Networking companies Cisco Systems, 3Com and
Ascend Communications all started out the week
on an upswing and got a further boost Wednesday
in the wake of 3Com's posting of
better-than-expected earnings for its fiscal second
quarter.
Of course since networking companies do not yet
move in Internet time it has taken shares in 3Com
two months -- not two days -- to double. Still, that's
a healthy return by any standard other than that
set by the Yahoos of the tech-stock world.
On Thursday shares of all three companies
slipped, but all were just off 52-week highs set
earlier in the week. In Nasdaq trading Thursday,
shares of Cisco slipped 2 5/16 to 94 3/16, 3Com
shed 1 1/2 to 46 1/4 and Ascend fell 3/8 to 66.
Meanwhile, the Nasdaq Composite Index slipped
9.51 to 2163.03 in a shortened session Thursday,
while Morgan Stanley's high-tech 35 index
retreated 6.07 to 860.71.
Cisco is no slouch when it
comes to valuation -- it has a
market capitalization of almost
$150 billion, which makes it
the third-biggest company on
Nasdaq. And the company's
shares have almost tripled over
the course of this year.
But nothing turns the company's share-price chart
into a pancake faster than a comparison to the
more than tenfold gain Amazon's shares have
seen so far this year.
Ascend and 3Com, meanwhile, are both valued
less than Yahoo -- even though they are expected
to generate far bigger earnings than the portal-site
giant.
With investors starting to make these
comparisons, the recent enthusiasm for
networking companies isn't surprising. But it does
worry some analysts.
"To a certain degree the networking companies --
especially Cisco -- have crossed the border into
the Internet-enthused valuations," said Christin
Armacost, an analyst at Everen Securities Inc. "If
you start your valuation process by looking at
Amazon and Yahoo and then move over to the
companies who are really building the Internet,
then the valuations are justifiable."
Such a methodology isn't necessarily the best way
to value company, she conceded. Still it's tough to
fight investor psychology, which puts the
networkers in the high-flier camp along with the
Yahoos and Amazons of the world, she said.
She has all three networkers rated "buy," with
six-month price targets of 102 for Cisco, 55 for
3Com and 69 for Ascend.
But there are some
analysts willing to fight
the tape on Cisco. Paul
Sagawa, an analyst at
Sanford C. Bernstein &
Co., has the giant rated a
"market perform"
because he is "cautious
about the degree of Internet euphoria in Cisco's
stock."
Cisco now trades at almost 60 times expected
calendar 1999 earnings, and Mr. Sagawa thinks
that implies investors have lofty earnings
expectations that the company could have a hard
time living up to.
He adds that the bulk of Cisco's revenues come from sales to big corporations that are building networks, rather than from sales to companies building the Internet backbone. He expects those intranet-building companies could scale back tech spending next year. (THIS IS WHAT I HAVE BEEN TELLING CSCO LONGS!)
"[Cisco executives] understand that the growth in
communications generally is going to come from
the Internet rather than selling office equipment,"
Mr. Sagawa said. The company is clearly focused
on increasing sales to telecommunication-service
providers, and that should be a good thing in the
long term, he said, but adds that "when companies
go through these kinds of transitions, rarely do
they do so without seeing some sort of a hiccup."
Mr. Sagawa has "outperform" ratings on 3Com and
Ascend.
Thursday's Market Activity
Online auctioneer uBid put up gains of 50 3/8 and
53 1/2 Tuesday and Wednesday, so it was almost
inevitable that some pullback would be in the
works. That's what happened in Thursday's
truncated trading day, as the company saw its
shares plunge 66 3/8, or 35%, to 121 5/8. That
dragged down Creative Computer -- which owns an
80% stake in uBid -- 19 5/8, or 33%, to 40 1/16.
Shares of Multiple Zones International fell 26 1/2,
or 47%, to 29 1/2, a day after investors cheered
news that the company officially launched an
online-auction service by sending its shares up 44
7/16. Online-auction leader eBay, meanwhile, fell
12 to 286.
Internet-retail king Amazon.com slipped 3/16 to
324 13/16, while America Online fell 1 3/8 to 136
5/8. Elsewhere, Onsale slid 3 to 60 1/2 and portal
giant Yahoo! skidded 2 7/8 to 247 1/8.
Shares of Zapata, the Texas fish-protein and
food-packaging company with dreams of
becoming an Internet powerhouse, fell 1 7/8 to 12
3/8 a day after the company said it was
relaunching its Internet plan two months after
calling the whole thing off amid a downturn for
Internet stocks.
Delia's advanced 7 1/4, or 67%, to 18 1/8 after the
seller of apparel and accessories for young
women opened an online retail site on Yahoo!
shopping.
Shares of SkyMall, an in-flight catalog company,
rose 6 3/16, or 97%, to 12 9/16, apparently boosted
by talk on Internet message boards. Meanwhile,
shares of PC Connection, a direct marketer of
brand-name personal computers and related
peripherals, software, accessories and networking
products, rose 8 1/4, or 59%, to 22 1/4, possibly in
reaction to the company's being mentioned on
CNBC Wednesday.
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