WSJ:
July 1, 1998
EarthLink, MindSpring Lead
Internet Stocks to New Highs
By LISA BRANSTEN
THE WALL STREET JOURNAL INTERACTIVE EDITION
SAN FRANCISCO -- Analysts had sticker shock back in January when
RCN, a telecommunications-services provider, bought Erol's Internet for
$83.5 million in cash and stock, or about $120 million including debt. The
buyout came just ahead of a planned initial public offering for Erol's that
valued the company at $100 million.
In hindsight, however, that deal looks incredibly cheap: Two only slightly
larger Internet-service rivals of Erol's -- MindSpring Enterprises and
EarthLink Network -- now hover around $1 billion in market value after
another runup in Internet stocks Wednesday. Meanwhile, shares of the
more-diversified RCN have slumped since peaking in March.
In Nasdaq Stock Market trading, EarthLink
surged 10 1/4, or 13%, to 87, while
MindSpring jumped 5 3/8, or 5.2%, to 108
1/4, hitting new closing highs. In the broader
market, the Nasdaq Composite Index gained
19.72 to 1914.46 and Morgan Stanley's
high-tech 35 index added 12.28 to 608.08.
While the entire Internet sector surged Wednesday -- Amazon.com,
Yahoo!, Lycos, Excite, DoubleClick, America Online and RealNetworks
all closed above their all-time highs -- EarthLink and MindSpring stood
out.
The easy answer for the ebullience surrounding EarthLink and MindSpring:
Both companies recently announced that they will split their stocks, further
fueling a rally that began in late May. EarthLink Wednesday announced a
2-for-1 split effective July 15, following MindSpring's move a week ago to
split its stock 3-for-1 on July 9.
But the more complicated answer has left
analysts divided about the long-term ability of
these stocks to hang onto such lofty
valuations. After all, at these levels, both
companies are trading at almost 70 times
estimated 1999 earnings (yes, 1999 earnings).
And much of the activity is based on Internet
hype and takeover speculation.
For some, such as Ulric Weil of Friedman,
Billings, Ramsey & Co., the activity suggests
outrageous valuations placed on stocks by
relatively unsophisticated retail investors.
"This is the Internet frenzy, and people who
are not very market-savvy don't ask about
[price/earnings ratios], they just say 'buy me
some,' " he said. "One of these days it will
stop and the air will go out of the balloon
pretty fast."
But others, while growing increasingly
cautious, believe that these companies, by
virtue of participating in one of the
fastest-growing segments of a communications
revolution, deserve revolutionary valuations.
"It's very easy to make an argument that these
stocks are overvalued, but you have an
industry that's growing like wildfire and a
bunch of companies whose fundamentals are
excellent," said David Levy, an analyst at ING
Baring Furman Selz LLC. There needs to be
some trigger to bring these stocks down, and
he doesn't see any bad news looming. He
believes both EarthLink and MindSpring will
report strong second quarters later this month.
Last year, EarthLink had $79 million in
revenue and MindSpring had $53 million. In
the first quarter of this year, EarthLink, while
posting a loss, had revenue of $29 million, an
85% increase from the same period last year.
Meanwhile, MindSpring began reporting small
profits in the fourth quarter of last year.
First-quarter revenue of $21 million was
118% ahead of the same period for 1997.
While both companies have exceeded Mr. Levy's price targets, he has left
them at a "strong buy" and said he is re-evaluating the targets. "Putting
price targets on these stocks is like an exercise in futility because they blast
through them every hour," he said.
On Friday, Robinson-Humphrey Co. analyst Jeff Sadler raised his price
targets on both MindSpring and EarthLink to $120 and $108 respectively.
Mr. Sadler said his move was based on a number of factors, including
benefits the two companies may get from the Tele-Communications
Inc.-AT&T merger announced last week.
Mr. Sadler said dial-up Internet-service providers in general should benefit
from the merger; he believes that "as local telephone access is provided
over cable networks, carriers will have to provide 'equal access' to
competitive offerings." That should resolve the question of how dial-up
providers would compete with the growing cable-based access providers
such as AtHome.
AtHome, for its part, climbed 6 3/16, or 13%, to 53 1/2 on Nasdaq,
helped by the announcement that it signed a series of agreements giving it
exclusive access to more than three million cable-TV customers (see
article).
Despite their optimism, Mr. Sadler and Mr.
Levy placed some caveats on their
recommendations. Mr. Sadler said
MindSpring stock would be especially
attractive for new investors if some of the
takeover speculation subsides, allowing the
stock to retreat a bit.
And Mr. Levy conceded that he makes no
claim to predicting what the overall market will do, and "if the market gets
hit, these guys are going to get smacked."
Wednesday's Market Activity
Elsewhere in the technology sector Wednesday, Advanced Fibre
Communications plunged 20 15/16, or 52%, to 19 1/8 after the
telecom-equipment maker company said it expects second-quarter
earnings and revenue to be below Wall Street's expectations (see article).
Netscape Communications gained 8 5/8, or 32%, to 35 11/16 on
Nasdaq. The Internet-software company is looking to strike deals with
media companies that would provide content for its Netcenter site,
Executive Vice President Michael Homer said in an interview on CNBC.
He said Netscape would explore possible relationships with CBS, NBC,
ABC, Fox and some other "prime providers of content" (see article).
Microchip Technology rose 4 1/8, or 16%, to 30 1/4 on Nasdaq. The
specialized chip maker said it expects first-quarter earnings to beat
analysts expectations of 27 cents a share. The quarter ends June 30. BT
Alex. Brown raised its rating on the stock to "buy" from "market perform."
* * *
Prudential Securities analyst Don Young said he expects the second half to
hold "dramatic improvement" for so-called indirect personal-computer
makers. In a research note, Mr. Young projected continuing strong results
for direct PC manufacturers like Dell Computer Corp. and Gateway Inc.
But he said the inventory problems faced by the indirect players appeared
to have hit bottom in the second half. Mr. Young singled out International
Business Machines, Hewlett-Packard and Compaq Computer. |
