eMailbag: Bargain Time, CDnow, Cyberian Bot?

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.

The “over-attention” to a few stocks leads
to extremely high levels of expectation for them, high valuations.
Unrealistic by our accounts. If any one of them falters, then the media says
the “bubble burst” for all Internet stocks (by implication). Some
never had the bubble to begin with.

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 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.

USWeb-CKS Gee?

“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

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 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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