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Internet Stocks Vs. Phantom Menace

Perhaps it's just coincidence but maybe there's something to the fact that Star Wars Episode 1, The Phantom Menace, opens soon while another phantom menace also has been stirring: Alan Greenspan, the man who has yet to log onto AOL for the first time and has trouble spelling it.

I am a big Greenspan fan but as the Federal Reserve unsheathes its light sabers (interest rates) to battle the dark side of the Force (inflation) then I wonder if Obi-Wan Alan is just posturing for the sake of not being a broken record with the usual "rates unchanged position" or if there's something stirring under the robe after all. And we're not suggesting Bob Dole's product endorsement of Viagra hasn't had an effect on the market schwings of late either. Anything goes in the choppy market, as Lorena Bobbitt's investment club might say.

Take into consideration the blast the overall market took yesterday as those not accustomed to the Force may be wanton to forget: all the indices dropped on Obi-Alan's rate swash buckling. Tally at the bar:

ISDEX, off 6 points; NASDAQ, off 3.48 points; DJIA, off 16.52 points. On a point basis that's not enough to worry about but the underlying rip current is in my opinion.

Looking at a week's snapshot shows the current has turned somewhat bearish as just 9 of the 50 stocks in ISDEX make gains since May 13. The amazing thing is that this week's worst performers were last week's best. Let's see:

ISDEX ®   19-May-99 % change
The Internet Stock Index   close from
www.isdex.com     13-May-99
       
ISDEX   572.93 -3.8%
NASDAQ   2,558.36 -1.8%
DJIA   10,836.95 -1.5%
       
Open Market OMKT $ 14.00 10%
Axent AXNT $ 11.38 10%
USWeb USWB $ 28.06 8%
CheckPoint Software CHKPF $ 44.00 7%
Cyberian Outpost COOL $ 13.94 7%
Verisign VRSN $ 128.75 7%
Lycos LCOS $ 112.94 6%
Prodigy PRGY $ 26.94 3%
Broadcom BRCM $ 98.38 2%
VocalTec VOCLF $ 11.25 0%
CMG Info CMGI $ 239.44 0%
Network Solutions NSOL $ 71.88 0%
E*TRADE EGRP $ 111.03 -1%
Preview Travel PTVL $ 23.38 -2%
Earthlink Network ELNK $ 62.13 -2%
Egghead.com EGGS $ 13.31 -2%
Cisco CSCO $ 116.19 -2%
RealNetworks RNWK $ 92.38 -2%
Mindspring MSPG $ 87.13 -3%
24/7 Media TFSM $ 43.75 -3%
America Online AOL $ 134.06 -3%
Network Associates NETA $ 13.44 -4%
ISS Group ISSX $ 58.25 -4%
Beyond.com BYND $ 23.94 -4%
eBay EBAY $ 189.56 -5%
PSINet PSIX $ 49.88 -5%
Security First Technologies SONE $ 50.13 -5%
@Home Network ATHM $ 150.25 -5%
CNET CNET $ 119.63 -5%
Excite XCIT $ 154.19 -5%
CDnow CDNW $ 19.38 -5%
Exodus EXDS $ 84.63 -6%
Doubleclick DCLK $ 117.75 -6%
Go2Net GNET $ 125.00 -6%
GeoCities GCTY $ 105.75 -7%
CyberCash CYCH $ 15.50 -7%
Infoseek SEEK $ 48.25 -7%
Broadcast.com BCST $ 116.56 -7%
iVillage IVIL $ 63.50 -7%
Amazon.Com AMZN $ 132.63 -7%
Yahoo! YHOO $ 156.81 -8%
Onsale ONSL $ 22.50 -8%
Concentric CNCX $ 83.50 -9%
Security Dynamics SDTI $ 19.88 -9%
Broadvision BVSN $ 46.13 -9%
Inktomi INKT $ 110.38 -10%
Infospace.com INSP $ 53.50 -12%
Verio VRIO $ 63.06 -12%
Xoom.com XMCM $ 68.13 -14%
Sportsline USA SPLN $ 35.25 -17%

Essentially Fed reserve rate fear increases could hamper the Internet stock sector as it softens the underlying demand for more speculative issues in general. The basic formula is higher interest rates equal tightened earnings as money becomes more expensive.

Driving the bull market these past millenniums has been a very economy-friendly interest rate level that makes the American economy (and the information economy which drives it) the envy of the world.

Among the galactic shifts:

  • 99.05.19 - Lycos (NASDAQ:LCOS) posts strong results with revenue up 132% to $35.2 million for the quarter. Loss reaches $1.02 million, or $0.02 per share. The Web guide firm, which untangled itself from a proposed merger with USA Networks, also announced it acquires a 9% stake in Web auctioneer FairMarket. Page views rise 20% to 60 million per day. Lycos tosses in a 2-for-1 stock split as well and I believe Lycos could be much better off now as it grows without the baggage of USA Networks. Bob Davis looks back on track.

  • 99.05.18 - Security First (NASDAQ:SONE) decides to leap into the big leagues with a $1 billion buy of Europe's FICS, which makes software for banks. On the heels of that deal the Web bank software maker decides to snap up Edify for $17.87 per share or $345 million. Pro forma SONE will have a third of the world's leading 100 financial institutions using its service. Relatedly, finance software maker Intuit likes what it sees and invests $50 million, or $51.50 per share, for 2.5% of SONE. Deal swirl which makes sense in this unabridged sector. At $637 million market cap for SONE I don't know why Intuit stopped at 2.5%. To me Security First has taken a big step and raised its profile and leverage.

  • 99.05.17 - Beyond.com (NASDAQ:BYND) pops on no news but what I think could be a growing desire for larger commerce players to want to own an electronic-software delivery superstore. On valuation BYND looks like 10x annualized but what I forecast as 6x forward revenues with 2.1 million customers probably growing to perhaps 3 million to as high as 4 million by year end if growth rate continues at first-quarter rates.

  • 99.05.14 - CheckPoint (NASDAQ:CHKP) climbs 10.5% to $45 5/16 per share as the Internet security software firm announces two new products in as many days. One addresses the virtual private network space while the other the public key infrastructure space. I've been waiting for a loooong time for CHKP to break out and glad to see my faith. This is one I've waited for more than two years to find some running room. Security software in general has been a dog sector but of all of them I see CheckPoint and Security Dynamics (NASDAQ:SDTI) as having the most potential. Network Associates has some also if it can get past shareholder lawsuits.

  • 99.05.14 - Xoom.com (NASDAQ:XMCM) moves up and down after the NBC merger announcement but I think the deal makes sense for this basic reason: community is but one aspect of a larger Web service suite. The real battle is 5 to 10 years of cross-media pollination, cross-commerce pollination, TV driving Web and Web driving TV.

    There's a musical chair game being played now with community sites and those without major media merger partners may be left standing undercapitalized in the coming ecommerce wars of the future.

    theglobe.com (NASDAQ:TGLO) founders should be hiring investment bankers to shop their deal and stop playing college graduates-turned-Internet-millionaires wondering what to do now. Said another way it's time for Luke Webwalker to leave the farm.


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    Accolades:

    "Fresh and provocative" -CBS Marketwatch, who named Steve Harmon one of the top Internet stock analysts and only independent one honored

    "I am a huge fan of Steve Harmon's analysis" -Kleiner Perkins' John Doerr