eMailbag: CMGee? Netscape To Superscape? And More

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

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.

Value Hunting

“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
for an example of the former.

“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

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

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.

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