RealTime IT News

ISDEX Drops On Broad Market Musings

"Where Wall Street Meets The Web"

Last October we predicted a 20% to 30% correction in Internet stocks and so far this looks like it. ISDEX is off 22% so we could be near the bottom here. Hints that may be true come from the buying we're seeing in select Internet stocks as those looking for bargains or more attractive prices start to buy.

This same pattern occurred in July of last year and ISDEX rebounded in the next few months to close the year strong.

The only bright spot in ISDEX for the period February 2 to February 10 was Security First (NASDAQ:SONE), up 15% for the period. SONE gained on its fourth-quarter results that showed strong sales, up 184% to $9.7 million vs. 4Q97. Full-year revenue was $24.2 million, up 123%.

Security First's Internet-based applications for the financial services industry power large banks Web efforts. Some 542,000 accounts now use its software, a 938% vs. 12/31/97. And 93,000 end users were processed through SONE's data center, up 184%.

SONE's losses continued, however, with 1998 loss at $30.8 million or $1.96 loss per share before charges. With charges loss per share was $2.80 for the year.

In ISDEX the biggest decliners were led by Lycos (NASDAQ:LCOS) which announced a merger with USA Networks and Ticketmaster-Citysearch. The deal valued LCOS at $6.6 billion which we think is a fair value.

However, LCOS shares got hammered two sessions in a row based on the math at play here: the combined entity is not 100% Internet, it's a hybrid cable-Internet outfit. And cable programming or networks don't command the same multiples as Internet companies.

So you can't assign a 30x revenue multiple to a hybrid media concern. Mature media such as USA Networks (NASDAQ:USAI) trades on EBITDA cash flow. A typical cable cash flow multiple (or broadcast multiple) would be between 10x to 15x cash flow on its best day. Hence the pounding LCOS shares now take with the media multiple in effect.

Wall Street pays a premium for pure play Internet assets because their growth is phenomenal. USA/Lycos could be an extremely valuable firm going forward but they must execute now on the deal to draw out the value. It's always execution that means the most in mergers.

ISDEX ®   10-Feb-99 % change Point change % change
The Internet Stock Index   close from from from
www.isdex.com     02-Feb-99 02-Feb-99 31-Dec-98
ISDEX   282.12 -22.1% -80.22 -1.6%
NASDAQ   2,309.50 -6.2% -153.92 5.3%
DJIA   9,177.31 -1.0% -96.81 0.0%
Security First Technologies SONE $37.06 15% $4.94 22%
OpenText OTEXF $20.75 1% $0.25 -15%
Concentric CNCX $43.38 0% $0.00 30%
Egghead.com EGGS $16.88 -2% -$0.31 -19%
Open Market OMKT $13.19 -4% -$0.50 13%
IDT Corp IDTC $14.25 -4% -$0.56 -7%
CheckPoint Software CHKPF $41.50 -6% -$2.56 -9%
Axent AXNT $33.00 -6% -$2.06 8%
Sportsline USA