Several interesting bits from Briefing concerning the Internet and some stocks we follow here:
12:23 ET ******
Cyberian Outpost (COOL) 10 3/16 -1 3/16 : Always wondered about the name of this company. A clever play on "Siberian Outpost" but the Siberia version of the idiom has always meant the worst of the middle of nowhere images. Does a growth company really want that for their image? It may come to haunt them, because last night's after the market release of earnings was not a good story. COOL reported $32.7 million in revenues and earnings loss of $(0.38), beating earnings estimates of $(0.39) a share by one penny. But the sequential decline in revenue is the story here, and it's bad. The valuation of COOL, now at just 2 times sales, has fallen steadily from 7 times sales in March and a remarkable 35 times sales when it IPO'd on July 31, 1998. If COOL gets a couple more quarters of revenue declines or basic flatness, it could wind up with a brick and mortar PC commodity retailer's valuation of just 0.1 (which is what Creative Computers (MALL) and CompUSA (CPU) have). After all, if an internet computer reseller doesn't show any growth, why should it be any different than any other retailer! If the market ever comes to this conclusion, and it would if the next two quarters are also flat in revenue, then COOL could drop as low as $1.00 a share. Certainly insiders seem to be coming to this conclusion: look at the long list of inside sales and the recent resignation of the CEO. Iinternet stocks have all benefited from the generally applied idea that overall internet growth will benefit all internet companies. But if you don't show growth, like COOL isn't, and the internet keeps growing, how long will the stock benefit from being "an internet stock?" Not long is our guess. COOL has to show strong growth over the next six months because the minute the market decides that Cyberian Outpost is just another computer reseller, forget it. The pun on "Siberian Outpost" won't be clever anymore. -RVG
COOL Chart
11:11 ET ******
Internet Merger Mania : We argued in a recent Stock Brief that phase I of the Internet as a stock phenomenon was over, and that we are moving on to phase II -- a maturing of the Internet sector that will emphasize picking the winners rather than closing your eyes and picking anything with a dot-com on it. Recent market activity supports this view, particularly the poor performance of some low quality IPOs. But there is another aspect of phase II that is noteworthy: consolidation. Two prior Story Stocks today detail a rumored CMGI (CMGI) purchase of Compaq's (CPQ) Internet assets and Metromedia Fiber's (MFNX) acquisition of AboveNet (ABOV). And of course there are rumors today that Gateway (GTW) will acquire Earthlink (ELNK) and Amazon (AMZN) will acquire Beyond.com (BYND). This frenetic merger activity will become the rule rather than the exception in the Internet sector. Consolidation will be driven by two factors. First and most important is the perception -- most likely correct -- that most Internet industries will be dominated by perhaps three players, and numbers 4, 5, 6, and beyond will suffer. This has been the case in most other tech sectors in recent decades; CSCO and LU in telecom equipment, MSFT in software, INTC in semis, and DELL in PCs all come to mind. The second factor is the incredible pressure on Net companies to meet revenue estimates. Lacking earnings, most Net companies are valued on revenues. If revenue growth slows or halts, the chances that a company's earnings will ever justify its current valuation becomes remote. The market will punish companies that come up short on revenues -- note today's decline in Cyberian Outpost (COOL) after it reported a sequential revenue decline yesterday. One way to avoid that danger is to achieve revenue goals through acquisition. Of the current rumored mergers, we see one in each of these categories -- AMZN/BYND would be an example of a leader attempting to solidify its dominant position, while the rumored MLTX/MARG deal would be an example of a revenue-driven merger (we have no idea if either rumor is true, but they are good examples). Though it's a dangerous game, one way to play phase II of the Internet phenomenon is to identify merger candidates. Pick correctly and you get a nice premium; pick incorrectly and you might ride an also-ran down 50%. We'll be writing more on this theme more in coming weeks/months. - GJ
10:10 ET ******
Metromedia Fiber Network (MFNX) 37 1/8 -5 3/8 : It's just one deal after another over at Metromedia Fiber Network. Just two weeks after announcing a landmark deal with Bell Atlantic (BEL), Metromedia acquires AboveNet (ABOV) for 1.175 shares of MFNX for each share of ABOV (currently 40 9/16 +3 13/16). This values AboveNet at $1.3 billion, or a Price/Sales ratio of 130. Wall Street's reaction seems to be negative, based on valuation of AboveNet, but at Briefing.com, we like the deal. Metromedia has been in the business of leasing "dark fiber" networks to businesses. A dark fiber network is the physical infrastructure for a network, but without a set protocol. The customer can run any type of information protocol they want, all voice, all IP-based data, a minicomputer based network, or even older protocols like token-ring networks. Metromedia just provided the physical infrastructure and they have been singing up customers faster than analysts had planned. The Bell Atlantic deal was to install Metromedia equipment into BEL's central offices and then lease the local exchange capacity to other communications companies. It was a good deal for BEL because they can't get into long distance service until they start allowing competitors to offer local phone service. Now Metromedia's acquisition of AboveNet makes Metromedia a provider of leased internet networks, not just dark fiber networks. This should be a much more powerful offering, because it simplifies life for small businesses. AboveNet's target market has been ISP's but as corporations grow, AboveNet can start selling what will essentially be private intranets between locations. And AboveNet's physical network infrastructure fits remarkably well geographically with Metromedia's existing dark fiber network. We really don't know whether Metromedia's customers are using the system primarily for voice or data, but the AboveNet acquisition makes Metromedia a much broader service provider. It looks likeWall Street doesn't like this deal, the stock is off sharply, but some of the decline is normal merger arbitrage where you short the acquirer and buy the acquired. There may be some who feel that Metromedia is overpaying, but the market cap premium is only about 10%, based on yesterday's ABOV close. Frankly, we think six months from now, any overpaying will have been forgotten. It's a buying opportunity for long term holders of Metromedia Fiber Network. - RVG
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