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Technology Stocks : Egghead Computer (EGGS) -- Ignore unavailable to you. Want to Upgrade?

To: Annette who wrote (6808)	2/13/1999 10:11:00 PM
From: Dorine Essey	Read Replies (1) \| Respond to of 8307

Annette, This was taken from Jubaks column : But an Internet company such as Egghead.com (EGGS) has only 24 million shares outstanding. And theglobe.com has just 10 million shares outstanding. In fact, all but the biggest Internet names have issued a relatively modest number of shares. Lycos has 43 million out and eBay (EBAY) has 40 million. Amazon.com (AMZN), with 158 million shares, and Yahoo! (YHOO), with 197 million, are the top of the heap. Think about what those numbers mean. One big mutual fund -- Fidelity Magellan -- has bought 2.2 million Wal-Mart shares since last March. Any chance that a fund could buy 2 million Egghead.com shares -- one-twelfth of all those available -- without sending the price into orbit? A good part of the Internet bubble has been caused by the relative scarcity of Internet shares. There simply weren't enough to go around. A fresh supply of Net stocks The supply has radically expanded recently. Company after company has either sold or filed to sell secondary offerings. Egghead.com, for one, intends to sell 4.8 million shares. An offering that size wouldn't ruffle the market for Wal-Mart -- it would amount to just 0.2% of the 2.223 billion Wal-Mart shares now outstanding. And it wouldn't have a major impact on Vitesse either -- only a 6.5% increase from the 74 million Vitesse shares now on the market. But a 4.8 million-share offering by Egghead.com increases the company's stock supply by 20%. The supply of Internet stocks has radically expanded recently. Company after company has either sold or filed to sell secondary offerings. And Egghead.com is a relatively benign illustration of the point among Internet stocks. Thanks to the company's previous long history as a retailer, all of its 24 million shares outstanding actually trade in the market. That's not true for young Internet companies only a year or so away from an IPO. Take Network Solutions (NSOL), for example. Until Feb. 9, only 4.2 million Class A shares of the 16 million shares of Network Solutions' outstanding stock actually traded. The rest, 11.9 million Class B shares, were locked up. Individuals and groups that invested when the company was private owned these Class B shares, and according to the rules of the IPO, investors were unable to trade the stock publicly. Network Solutions sold 4.6 million shares of Class B stock for those investors Feb. 9, after converting them into Class A shares. That actually increased the number of Network Solutions shares available to trade publicly -- what's called the float -- to 8.8 million from 4.2 million, a 110% increase in supply. I can't quantify how much of the nearly $100-a-share drop in the stock from Jan. 29 through Feb. 9 is due to increased supply since Network Solutions has trouble on other fronts, too. But I'm sure the added supply didn't help. It also doesn't help that the offerings by Egghead.com and Network Solutions were just part of an avalanche of Internet IPOs and secondary offerings that began gathering speed in January. It's hard to get a firm handle on these since some may still be canceled if the market drops fast and far enough. But around 30 were initially on tap for just the week of Feb. 8. Details -------------------------------------------------------------------------------- Company Report 1-yr Chart Company Report 1-yr Chart Company Report 1-yr Chart This extra supply wouldn't be so hard for Internet stocks to absorb if demand weren't taking a hit right now, too. After the At Home (ATHM)-Excite (XCIT) deal, everyone on Wall Street raised their price targets for Internet stocks, such as Lycos, which owned a reasonably well-visited piece of Net real estate. On Feb. 8, for example, Merrill Lynch analyst Tonia Pankopf set a 12-month price target for Lycos of $165 a share. The stock, she wrote, “deserves at least a 30% premium to the multiple” that At Home paid for Excite, since, aside from Yahoo!, Lycos is the last unaffiliated search and navigation company. At Home paid 28.5 times Pankopf's estimate for Excite's 1999 revenue. Lycos, at a 30% premium, should be worth 38.5 times 1999 revenue -- or $165 a share. The logic here is clear. Even if the supply of shares for Internet stock was climbing, the supply of unique Internet companies wasn't. The supply of those was, in fact, shrinking just as demand from companies such as General Electric's (GE) NBC unit and Microsoft (MSFT), the parent of MoneyCentral, was perceived to be increasing. At least that was the theory before Feb. 9. But Diller's extremely complicated deal to buy Lycos, for what appears to be at best a slight premium to the $127.25 that the stock commanded on Feb. 8, blew that theory out of the water. The deal prices Lycos at 30 times projected 1999 revenue and 20 times projected 2000 revenue. And if Lycos is worth so much less than its fans had calculated, then maybe other Internet stocks were overvalued, too.