INTERNET STOCK OUTLOOK: THE ONES TO WATCH IN 1999!
by Chris Agarwal
NTERNET STOCK NEWS™
internetstocknews.com
The Premiere Internet Industry Communication Vehicle
December 31, 1998
As we say goodbye to what may go down as the most notable year this decade we can't help but shed a tear. We have long believed that the Internet would some day be realized by the masses as an amazing opportunity for growth. In 1998 investors finally started to open their eyes to this fact. When I started frequenting the Internet years ago there was no such thing as secure e-commerce, there were no Snap.com ads on television, and I had never heard of Team Lycos basketball. I'm sure we all remember the days of the BBS in the early 90's, connecting to America Online with a 14.4 modem (Oh how slow it was!), using Fetch, Archie, Gopher, Mosaic, and Telnet. Remember the days when one's destinations for web search were usually Yahoo! or Alta Vista? It seems like only yesterday, doesn't it?
Times have definitely changed. Just last week I watched the Insight.com bowl and checked the highlights at CBS Sportsline, I watched the impeachment hearing highlights using my Real Player, and I purchased all my Christmas presents from Amazon.com, Onsale, and eToys using my Yahoo! Visa credit card. It's sad to see greed and bureaucracy enter the world we once new as the World Wide Wait and to some extent I actually miss the Internet being so useless and slow. I think Kurt Cobain, the former vocalist for the rock band, Nirvana, stated it best when he said “I miss the comfort in being sad.” The Internet and specifically, World Wide Web, used to be a novelty that was enjoyable to use from time to time to find information that I could find nowhere else. Now it is a medium of mass communication far more efficient than television, radio, or print media and companies such as America Online and Yahoo! are considered some of the largest media companies in the world.
I can cry and moan all day, but it's not going to help. Tomorrow comes the year 1999. Everyone now knows about the Internet and is ready to bid up Internet stocks to ridiculous levels. For those of you who have been following us since 1997 when we had the infamous name which we won't dare disclose in fear of humiliation, it is now time to pay attention. The stakes have been increased 100-fold. No longer are Internet stocks easy buys and holds. They are all over television and almost any company even remotely related to the Internet is immediately bid up to a multi-million dollar valuation. Remember when we were talking about CMGI at $30 a share? 24/7 Media at $6 a share? Peapod at $3.50 a share? Infoseek at $23? Excite at $25? Real Networks at $18? Do you remember when Onsale was priced at $12 and when CDNow at $8 looked overvalued? Those were the days, my friends. Those were the days when Internet Stock News was just a hobby, when I could look forward to spending my weekends on San Diego beaches and not answering phone calls from the media. Those were the days when we had just over 100 subscribers, all of which I knew by a names not including an “@” symbol.
1 ½ years, 55 IPOs, $23 billion in market capitalizations, 30,000 subscribers, 10 employees and a few interviews later, here we stand. We are now considering opening up a corporate office in sunny Carlsbad, California and doing our own public offering to fund our new Internet ventures such as free real time quotes on our upcoming web site.
This week, all of our editors came together and picked a group of companies that we thought would fare best in 1999. What we were looking for was mainly evidence to show that these companies would benefit by the further acceptance of the Internet by the general population because of their positions as leaders in their Internet sectors. These are only publicly traded companies and if we had to throw private companies into the mix, there would, no doubt, be a different story. However, investors have to spend their money on something and after four straight years of bull markets, they have a lot of money to spend. Just as a quick note, the editors and holding company of this newsletter do hold positions in some of these stocks listed here. However, whether we held positions in these or not, we would choose the same companies. After all, it is our job to analyze the Internet sector on a daily basis so you can bet that we put our money where our mouth is. Here we go!
(In no particular order)
At Home (NASDAQ: ATHM): home.net, At Home is the leading high speed Internet access company. Using cable modems to provide access, the company can leverage users into dollars using a content network revenue model similar to what media giants such as Time Warner and Viacom make billions from. At Home provides Internet access at over 100x what your average ISP can provide and the stock is up over 325% this year. Remember that almost every single year since inception, AOL has increased in price upwards of several hundred percent. Looks to us like At Home is just getting started.
CMGI (NASDAQ: CMGI): cmgi.com, CMGI is a publicly traded Internet venture capital company. If you don't hear about this one in one year's time, we deserve to be shot. This company owns large positions up to 100% complete ownership in over 20 leading Internet companies involved in content, e-commerce, advertising, marketing, software, you name it! They are extremely profitable with over $1 per share in the past two quarters and trade at a P/E ratio of around 50. The company has had the insight to invest in AOL, Lycos, GeoCities, and many others and has received an almost 5000% return on equity. This is an Internet giant that very few know about.
Etrade (NASDAQ: EGRP): etrade.com, You are probably all familiar with this company. Etrade is the leading online broker. There are very few industries that can reap large amounts of scalability from the Internet and online trading is, in our view, currently #1. Simply connecting the trading system with a web interface and supporting it with staff and marketing has allowed this company to become extremely profitable. As other leaders in their categories such as Ebay, Yahoo!, and Amazon.com soar, what happened to Etrade? We think that after a few run-ups and corrections the leaders will be given higher valuations than usual essentially making them “Blue Chip” Internet stocks. Etrade is the leader in its category and can easily use its clout to leverage revenues out of many other finance-related practices.
Excite (NASDAQ: XCIT): excite.com , Everyone knows what Excite is. The question is why hasn't Excite joined the ranks of the high-flying Internet stocks? Share dilution and speculation is the answer. Ebay has some 3 million shares trading and Ubid has less than 2 million. When millions of unsavvy investors place market orders for these stocks they are bound to fly sky high. Market capitalizations are based on shares outstanding but created from the demand applied to the float. Therefore, you get some silly valuations. Any long term investor knows that Excite is considered to be #2 in the Internet portal race and that, if any company deserves the some $15 billion valuation given to Ebay, it is this one. When the shake out comes around and we know it will, the high-flying low-float stocks will tumble downwards and the institutions will look for the leaders in their category who have a history of knowing how to leverage users into dollars. We think that they need not look further than Excite.
SportsLine USA (NASDAQ: SPLN): sportsline.com , This company is working on #2 or 3 in the online Sports content sector and competes with ESPN.com and CNNSI.com for online sports network. As the major players have clout, CBS has branded this company and recently increased its ownership to over 10% with more warrants purchasable at up to $30 per share. Sports is a huge industry. It will take years for real sports fans to flock online but those years will come quickly. This company is the first pure-play Internet sports brand similar to the pure-plays of Yahoo!, Ebay, or Amazon.com that have been given high valuations. They suffered some because of the cold Football season and non-existent basketball season but we think they are still a strong contender. When sports get hot again, expect to see CBS SportsLine ads almost everywhere and expect the fools who watch them, whether it be individual investors or fund managers to go running to their trading stations.
Ticketmaster/CitysearchOnline (NASDAQ: TMCS): citysearch.com , If there was ever a company whose growth prospects were ignored by the media, this is it. While everyone says that the portal industry is changing and that the local portal business will be huge, have they forgotten who is the leader in that industry? CitySearch provides a brand name and backing by Barry Diller of USA Networks that we wouldn't be surprised to see plastered over every wall next year. They are in New York, Toronto, Nashville, Portland, LA and they are coming to a town near you! What better way to start using the Internet is there than to visualize its interface as a friendly portal to your neighborhood stores, activities, and surroundings? Clearly the leader in its category, based on its market cap. , they have already experienced a behind-the-scenes run-up twice that of Ubid or half that of Ebay's. Who knew?
Peapod (NASDAQ:PPOD): peapod.com , Once again, if you are looking for a company that is the leader in its sector and that no one has heard of, here it is. While most of us continue to shop for groceries by visiting the store braving crowded parking lots and long lines, there is another type of shopping going on elsewhere in which the store is brought to you for less! This is Peapod, the leading national online grocery store. While there is less scalability in this industry then in others, there is little overhead because there is no physical store needed and less marketing needed because much can be done online. They have the brand name, the following, and the experience. If anyone can implement the idea on a national basis, Peapod can.
Real Networks (NASDAQ: RNWK): real.com , Real is the leader in Internet broadcast media and Internet investors are shallow to say the least. Fickle day traders and Internet newbies have spent far more on a web site called Broadcast.com than they have on the content and technology that would even enable that web site to exist. Real Networks provides broadcast content using the Real Player software downloaded to over 70 million PC's and specific channels such as Bloomberg and ABC News. Once broadband access becomes popular, watch out. A partnership with someone like At Home could be even more scary. We are talking about the media networks of the future. A buyout may be a strong possibility also. A company like Time Warner could get their paws on 70 million PC's for chump change if they wanted to. Will Rob Glaser stubbornly hold out is the question we ask.
DoubleClick (NASDAQ: DCLK): doubleclick.com, This should be a no-brainer. Internet advertising is supposed to reach billions of dollars by the year 2000. Who is the leading Internet advertising agency? You guessed it. What type of valuations do leaders get? Yahoo!'s got $24 billion, Ebay has $10 billion, and Amazon.com has $17 billion. DoubleClick hasn't even a billion. Go figure.
Onsale (NASDAQ: ONSL): onsale.com , While greedy and unsophisticated investors place their bets on Ubid, Ebay, Cyberian Outpost, Amazon.com and other e-tailers, they have almost forgotten about the founder of large scale e-commerce. While AOL has spent years achieving 15 million subscribers did someone forget that Onsale has spent far less logging 9 million bids? With a major alliance with Yahoo! to provide online exchange similar to Ebay as well as small business auctions and everything from $99 Nintendo 64's to $12,000 Xerox copiers being sold on their branded site, we think Onsale deserves some more recognition in 1999.
Others worth considering:
Barnesandnoble.com: barnesandnoble.com , This company postponed their IPO just recently but then their parent company announced plans to purchase Ingram Book, one of the largest distributors in the world. After selling half its online business to German media giant Bertelsmann AG, Barnes & Noble will easily have the financial backing and reach to win the race against Amazon.com and others. Whereas Amazon.com has been given a $17 billion valuation, Barnes & Noble which would own half of its online IPO spin-off has been given merely a $2.5 billion valuation. As we get closer to a possible resumed IPO for the company, we may see the parent stock, (NASDAQ: BKS), to appreciate quite a bit. After all, the large majority of humans on this Earth and in this country still think Barnes & Noble when they think of books and we doubt that will change any time soon.
CNET (NASDAQ: CNWK): cnet.com , CNET is one of the most frequented online networks on the Internet. It is a true network model more similar to television than are Yahoo! or Excite and some of that may come from their television division. With backing from NBC and ownership of much of Snap! we wouldn't be surprised, once again, for investors to fish up shares as they see the Snap! ads rollout and revenues come in. At around $50 a share, once again, there is a lot of speculation that could have occurred here that hasn't as of yet. We still believe strongly that the traditional media networks will enter the race with full force very soon and that we have barely scratched the surface of this evolution. Next year will be the year to get in or get lost in our opinion.
Lycos (NASDAQ: LCOS): lycos.com , Another no–brainer, Lycos is one of the largest online portal networks in the world. It is rated #3 behind Excite and is still valued at far less than Ebay, Ubid, Amazon.com and others. We don't think this will last very long. As the rumor of a CBS buyout last summer, the company will no doubt be eyed by many media firms. If consolidation hits, an Excite-Lycos partnership or the similar would also be blockbuster although we doubt Excite's young and therefore somewhat egotistic founders will let that happen. Nevertheless, once net stocks drop like flies and the stages are set for another rally, the leaders in terms of user base and brand name will remain, Yahoo!, Excite!, and Lycos!.
CDNow/Music Boulevard (NASDAQ: CDNW, NASDAQ: NTKI): cdnow.com , musicboulevard.com , One area that has been left unpublicized by media is the Internet music industry. Music is huge. MTV continues to be one of the most watched television stations in the world and American pop music is much larger in other countries than it is in the U.S. Combine CDNow's vast purchase networks created from their long-standing history on the Internet along with Music Boulevard's comprehensive online content and you get the leading online music company. With rumored buyouts from Time Warner and Barnes & Noble, the pair trade at far less of a revenue multiple than do other high-flying e-tailers. They won't last on their own and the larger players can't reach their audience. We think a buyout may occur this next year.
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