eMailbag: Bargain Time, CDnow, Cyberian Bot?
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First reader up this week writes: "Steve, after the May correction when many ISDEX gains had been hurt, you suggested that we were at more sustainable and reasonable growth rates (I recall 38% vs 85%). With the year's gains wiped out, how do you feel about ISDEX's prospects? Is this bargain time again?"
Reply: ISDEX at under 100 trades below where it began 1998 with the broad indices also under water. ISDEX runs to the 180-plus level in April and briefly again in July were dominated by too few stocks. Will it rise again? The industry grows exponentially beyond anything that Wall Street can imagine.
However, if we look at the rise this year, we would rather see an across-the-board rise in the group, or at least more dispersed gains that reflect the overall growth of the industry. No one stock provides a bellwether for the truly dynamic mix of industry diversity: content, commerce, access, security, hardware, software, fiber, cable, and services.
When a stock such as Yahoo (NASDAQ:YHOO) or Amazon (NASDAQ:AMZN) receives too much attention from the media (and then retail investors or vice versa) we believe it's not good for that firm or for Internet stocks in general.
It's time to stop being enthralled with logos, brands and science fictionalized accounts of how one or two firms will dominate the Internet. In short, we expect ISDEX to perform well over time, if institutional and individual investors begin to realize that the Internet on Wall Street is more than a handful of stocks.
"Concerning CDnow (NASDAQ:CDNW) and rival N2K (NASDAQ:NTKI), what do you think of these two after the recent stock bloodbath? With Christmas on the way, it seems like CDNW would be an bargain. But, then again, you guys have been the experts here, and your wise picks have fattened the pockets."
Reply: The holiday season may put them back on the charts, but for now they're hitless. Both music e-tailer stocks have struggled and are down more than 40% this year.
Two things we see: 1) The premature belief that Junglee (Amazon) and 'bots' will replace the branded shopping experience. Bots (see www.pcwebopedia.com for what bots means) may become big, but there's a long way to go.
2) Investors may forget the slew of exclusive marketing and retail deals that both firms have struck with all the high-traffic Web sites and services--AOL, Yahoo, Excite, Lycos, Infoseek, GeoCities, etc.
"Could you please explain why CKSG isn't trading at 1.5x the price of USWB? If USWB trades at 10.5 with the merger, CKSG should trade at 15.75, right? Isn't there an arbitrage opportunity here by buying 1000 shares of CKSG and shorting 1500 shares of USWB? What reasons could account for the discount in CKSG shares? What are the chances that the merger does not go through at this point? Finally, what do you think of the combined company?"
Reply: See Internet Stock Report September 4 for our take on USWeb's (NASDAQ:USWB) proposed $350 million stock swap for CKS Group (NASDAQ:CKSG).
>From our talks with USWeb's president, we understand the deal value is fixed at about $350 million. Arbitrageurs often get involved when deals like this are announced, but the market's not perfect and Wall Street appears to not be as enthusiastic to the deal as the two companies are.
"I was wondering about some of the "hot" Internet stocks like Digital River, Cyberian Outpost, and Egghead.com. Will they rise again or sink like the Titanic?"
Reply: As far as these three stocks goes, 'hot' may be too strong a word; tepid comes to mind. However, the market for PC hardware and software is multi-billions annually. We've liked Egghead in the past because we think its retail experience gives it an edge over newer rivals.
As with CDnow and N2K above, we think shopping search engines could thwart some of the sales potential to firms in any retail space.
The ability to instantly check the best price on anything anytime, anywhere, may not be that far off. That could squeeze margins further which are already razor thin for retail. Price wins, not retail branding, if the scenario plays out as we expect.
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