eMailbag Monday: Cendant, GeoCities, Netscape, CyberCash
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First reader up this week writes: "Have you ever done any work on Cendent (NYSE:CD)? They own the sites: Books.com, NetMarket, MusicSpot, GoodMovies, match.com, and rent.net. They also have investments in NetGrocer and possibly other companies? I imagine that these commerce sites are very valuable. It could make an interesting tracking stock."
Reply: We've looked at Cendant (formerly CUC) several times in reports about other more nimble firms but not on its own given its huge portfolio of non-Internet companies including hotels and rental car agencies. As you may or may not know, recently Cendant got in hot water for accounting irregularities and the stock dove for cover. However, CD trades near its 52-week low. The assets are still in place. We have a report on Cendant in the pipeline for Internet Stock Report after the dust settles over there. The gist of it: the Web (in our view) is the glue for Cendant's array of firms. Can it put Humpty Dumpty back together again?
Gee Oh Cities
"I wish I would have heard of you or read your report before I purchased stock in Geocities. Do you see any good news for them in the horizon?" Thank You, A new fan
Will the honeymoon last, can GeoCities leverage itself into a larger Web presence?
Now that it has capital and access to the public markets, a stock that it can use as acquisition currency, and a stock to attract new talent via incentive stock options the next 12 months will decide if GeoCities is prime real estate or podunkville. It almost has to compete with the directory firms Yahoo, Lycos, Excite, Infoseek in offerings or else merge with one of them.
Excite-GeoCities would be powerful in our minds, despite Excite's bet that smallish clubs will win out over topical-based communities. Although Yahoo has first dibs on a deal we believe since it invested in GeoCities before its IPO and investmate Softbank owns a chunk.
"Steve, now that Netscape has made the switch to being a destination, what do you think?"
Reply: Since more than one reader asked that, here's one of our reports that Netscape co-founder and one of our readers Marc Andreessen passed around Netscape at the time...January 6 Internet Stock Report. Seven months later we think Netscape has made excellent progress on the Web with Netcenter with AOL's Digital Cities and another deal with Citibank a few weeks ago. Netcenter could still, however, use some aggressive marketing clout and some more features that put it ahead of the "Web pack" YHOO, XCIT, SEEK, LCOS.
"I was looking at CyberCash and wanted to see if you thought it might be a buy at this time. I saw it is close to 52 week low. I saw it is ranked at the bottom for companies in the industry. Your comments are appreciated. I enjoy your report daily."
Reply: We think CyberCash (NASDAQ:CYCH) credit processing unit holds potential as credit cards migrate to the Web as the de facto "digital currency." And while we were skeptical of CyberCash's original e-currency plans news, August 20 looked interesting. CyberCash now promotes a new technology called 'InstaBuy' for launch in October that stores your credit card data on a merchant server (or CyberCash server) allowing you to make one-click purchases on the Web.
But, again, doubts rise. Microsoft (NASDAQ:MSFT) has a wallet feature embedded in the browser already, a feature taken right out of Bill Gate's book 'The Road Ahead,' (AKA The Road Others Travel First And We Pave Over).
Amazon, The Unabridged
"Steve, may I refer you to an article titled "How Much Is a Tulip Worth?" recently published in the Financial Analysts Journal dated July/August 1998, and also to a USA Today article published 7/7/98 Titled something to the effect of "Internet Mania". What is the deal with the ridiculous prices being paid these Internet stocks? Amazon.com has recently worn a sore spot in my saddle with the share price rising from $40/share up to the $140/share range. Kudos to those who got in early, but you would have to advise these people to cash out quickly.
There seems to be no regard for the fundamentals in the valuation of these stocks. This is highlighted by the fact that 60% of the stock is held internally (AMZN), and 20% by institutions. The remaining 20% seem to be caught up in this frenzy of the Internet and pay no regard to the fundamentals of a company who 1) has never turned a profit, 2) is projected to lose more per share next year (1999), than they did last year(1997) ($1.03/share-1997 vs. $1.13/share loss-projected 1999, 3) only posts revenues of $2.325/share (as compared with a MSFT $5.21/share, and MSFT cost of sales are much, much lower), and 4) for heavens sake, is BOOK STORE, with a market cap of $6.4B.
The company only employs about 650 people, so a head count reduction is not going to be any place to cut costs. I realize the company is moving into music and video sales, but as far as I am aware, you don't overcome losses through an increase in volume if your operating margins are negative. That only seems to exacerbate the problem (which is what is projected by the increase loss per share projections)."
Reply: We agree that fundamental valuations are unearthly. In our opinion Amazon would have to become the Wal Mart of the Web to sustain the valuation level it has today, according to our analysis. It looked attractive back in April but since then AMZN soared more than 320% to $129.6875 per share. Business-to-business e-commerce along the lines of EDI and e-commerce services appears to be a much deeper market than books, music or videos. That's one reason we now think USWeb (NASDAQ:USWB), Open Market (NASDAQ:OMKT) and Verisign (NASDAQ:VRSN) may be worth a look.
Note: as the leading Internet stock barometer on Wall Street, ISDEX, The Internet Stock Index, adds eight new stocks today to keep it on the leading edge of new companies and industry moves. The newbies: Broadcast.com (NASDAQ:BCST), Broadcom (NASDAQ:BCOM), GeoCities, Exodus (NASDAQ:EXDS), Inktomi (NASDAQ:INKT), ISS Group (NASDAQ:ISSX), Verio (NASDAQLVRIO), and 24/7 Media (NASDAQ:TFSM). Please do keyword search of the Archives of Internet Stock Report for our most recent analysis of each of them.
In tern et Investment Symposium '98 @ Fall Internet World!
New York City, Oct. 8-9 as Steve Harmon talks investments with some
of the leaders in the industry...top execs of GeoCities, CMG Info,
DoubleClick, venture capitalists doing the $ billion deals, debuts hot
startups at Startup Live!, and debates ups & downs of stocks with the
leading Internet stock analysts on Wall Street (Steve was one of them)
selected by CBS MarketWatch!"