eMailbag: CMGee? Netscape To Superscape? And More
Page 1 of 1
First reader up this week:
"Why not add Egghead if it is to be the 'Amazon' of software?"
Reply: ISDEX was updated last week (see ISR, March 12) to include 17 new stocks while we dropped 2 that were no longer "Internet" enough to stay: Forefront (NASDAQ:FFGI), which focuses on IT training, and Trusted Information Systems (NASDAQ:TISX), which is being acquired by Network Associates (NASDAQ:NETA), one of the new additions.
"What do you think of Secure Computing? I hear good things are coming in the near future and the company's stock value is about to take off? Also, that there may be a merger in the near future?"
Reply: We think that the Internet security software sector may be ripe for consolidation in a big way--if the big fish don't bite now the small fish may swallow them. We see Net-based security as a fragmented market with huge upside.
"I think Netscape is way undervalued. The sheep on the Street think Microsoft will destroy Netscape because that's what Jim Barksdale wants them to believe. They can and will leverage their software brand name into a gateway and ISP, deriving their revenue more from services. Netscape will have to give away its browser for free just like Microsoft.
Also with Win98 what the sheep don't realize is that Justice is forcing Microsoft to sell a version of Win98 that does NOT run their browser. This means that Netscape can protect its installed base. They got what they wanted."
Reply: I doubt Barksdale wants investors to believe Microsoft will destroy Netscape. Maybe you meant Bill Gates? Netscape as ISP, maybe. Navigator is already free. Win98 isn't here yet so let's see what "unbundled" means. If Netscape got what it wanted it would probably be more akin to Internet Explorer being denuded entirely from the OS and off the planet. A few goats in the herd after all.
"Am I understanding that because these Internet stocks are so difficult to value based upon the lean earnings, that in order to project valuation you are suggesting one other means of estimating and that is through market cap. "
Reply: You can do discounted earnings analysis and forecast where you think the ratio may be. When Netscape went public the reason it jumped is we (the Street and research analysts) figured a 50x earnings in two years and carried it at that expectation.
In a run-rate environment you can take market cap and divide by the past four quarter's revenue to get a "revenue multiple." Similarly, "enterprise value" takes a few more steps, subtracting cash and adding debt. Mecklermedia created a market cap-to-user ratio as well as market cap-to-page-view ratio to give investors more to chew on and for comparison sake. See ISR March 13 for an example of the former. Secured?
"Can you tell us the premium or discount (don't we wish) that the investor is paying for the "geniuses" at CMG? What is the underlying market value of its Internet venture capital holdings per outstanding share vs. the share price of CMG?"
Reply: Assuming a favorable public market, which is sometimes assuming too much, CMG's portfolio of private companies could be valued at more than the post-hysteria CMGI share run. Even at $550 million market cap, CMG still could be less than half the value of its off-balance sheet assets.
Lycos (NASDAQ:LCOS) alone may be worth $600 million--and CMG owns about 40% of that. Include the 30% CMG owns of privately-held GeoCities--which we value anywhere between $200 to $300 million at IPO.
Already we're at possibly $300 million off-balance sheet equity. And there's 10 or so firms CMG invests in yet to factor here. The only drawback we see to CMG is its outdated name and lack of clear message on Wall Street. Are you a public venture capital firm or not? We say yes and vote for a name change. Call it what it is and use the division driving this thing to the front: @Ventures.