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CMG INFORMATION SERVICES INC
Despite Premium Valuation, CMGI Remains Attractive (1/21)
Individual Investor Online Analysis
Reversing a spectacular rally staged in early January, shares of CMG have come under pressure. Since January 11, when the company announced a 2-for-1 split, the stock dropped 31%, to around $94. Downward pressure can be attributed to the overall weakness in Internet equities fueled by concerns about exuberant valuation and the ability of leading Internet players to sustain sequential improvements in operating performance. Alan Braverman of Deutsche Bank Securities, for example, recently downgraded shares of Lycos (Nasdaq:LCOS), Excite (Nasdaq:XCIT), and Yahoo! (Nasdaq:YHOO) to Accumulate from Buy pointing out that "…[Internet sector] valuation multiples have grown faster than the underlying business opportunities…"
With Lycos at $114, Geocities (Nasdaq:GCTY) at $63, and the value of private holdings, the fair value of CMGI's stock is approximately $67 per share, or 29% below the current valuation level. However, we believe that despite the fact that shares are trading at a premium, the stock is worth keeping at this point. Here is the rationale.
Recently, the company raised nearly $300 million (twice the amount that was originally expected) for its @Ventures III fund, through signing several high-caliber partners, including Microsoft (Nasdaq:MSFT), Paul Allen's, Microsoft's co-founder, Vulcan Ventures, BancBoston Capital, Sumitomo, and JAFCO America Ventures, a highly-regarded venture capital firm. CMGI raised an additional $50 million through the private placement of 4% convertible preferred stock (the dividend will be paid in CMGI's common shares) with Rose Glen Capital Management L.P.
The latest announcements indicate that the company is actively preparing to enter another phase of Internet-related acquisitions. In fact, CMGI has already taken the first step. On January 18, @Ventures III acquired a minority investment stake in Furniture.com, which is engaged in distribution of furniture items and providing related services, including personal showroom creation, via the Internet.
Factoring in expected acquisitions, we believe that the current fair value of CMGI's portfolio of Internet holdings is a conservative figure with considerable upside. Additional catalyst that should enhance the value of the portfolio is CMGI's plans, which we discussed in previous updates, to take several private holdings public this year.
CMGI also benefits greatly from favorable market conditions. As long as the market remains strong, which should be the case at least through the first half of 1999, shares of the company should continue to climb.
We reiterate our Buy recommendation of CMGI.
Analyst: Alex Yakirevich
Updated on January 21 with CMGI at $94.00
Recommended on 11/16/98 at $36.97 |
