eMailbag Monday: Lycos, CDNowWhat? Dell & IPOs

First reader up this week writes:

“Steve, I would appreciate your take on Lycos given the flap with the attempted acquisition. It has been at the lower end of your valuation scale in the first place, then the hit after the announcement made it worse. I have seen numbers showing that USA brings not so much in assets to the deal, the net of the combination becomes less of a pure Net play because of the marginal businesses of the USA contribution and Diller’s other interests, etc. I sense that there might be a great opportunity out there at $86, given the growth valuation of most net stocks.”

Reply: Lycos (NASDAQ:LCOS) ran on expectation of a clean-cut deal that valued it at a premium to the already-hot deal expectation fervor. Obviously the market seems to have stated that a merger and pro forma 30% ownership position in USA-Lycos was not the deal many apparently had in mind. It wasn’t a valuation dilemma but a post-deal percentage of ownership I think that gave investors cause for pause. Even so, valuation dropped after the merger package was announced.

According to my analysis LCOS on a value per user basis trades at 45% of the average for the top 10 Web sites.

At that level LCOS trades at the private market valuation per user of my estimate for Time Warner’s Web efforts and 37% of Excite (NASDAQ:XCIT) value per user. @Home is acquiring Excite in a $6.7 billion merger.

Are there other natural born buyers for Lycos out there? I see several combos that make sense.

CDNow, Or When?

“Steve, thank you for your great analysis it has helped me keep my stock picks sane. I have just subscribed and am looking forward to more expert analysis.

After the CDNow/N2K merger I purchased CDNW, on emotion, without waiting for your analysis on the deal. Did I make the wrong move?”

Reply: On a pure revenue multiple valuation basis CDNW looks semi-attractive to me. But its losses for 1998–$43.8 million–trouble me. With the merger with N2K the numbers get better for the two of them leading the music e-tail sales category with $98.5 million sales last year.

While Amazon remains a threat CDNow does have deals with AOL, Yahoo!, Netscape, MTV/VH1, Excite, Lycos/Tripod, GeoCities, and CBS Cable’s TNN, CMT and for distribution. It now must turn up the volume and own music e-tail and that’s all in how CDNow executes more than anything Amazon does or doesn’t do.

DELLiberating DELL

“It seems to me that, amongst all the hoopla for infant, fledgling Internet commerce companies, Wall Street is ignoring (at least on a p/e basis) those companies that already have what the newcomers are striving for…namely –
brand recognition, effective business models and profitability…CASE IN POINT – DELL. The company (as of last quarter) is doing $14 mil. in sales PER DAY via the Net…and the recent announcement and unveiling of their computer superstore – – was virtually ignored by mainstream press?”

Reply: My view: DELL (NASDAQ:DELL) represents a huge untapped potential in both its customer base and direct-selling expertise. I think DELL has a lot of leverage left on the table in its box and could be a category killer for not only PCs but technology items in general with gigabuys. To get there Michael Dell will have to think outside the box, however. I think may be first steps to perhaps realizing that.

Turf & Surf

“Steve, what do you think about iTurf’s IPO? Since iVillage has done so well with its IPO, could iTurf be as good because they seem to target a younger female market? What do you think?”

Reply: iTurf reports page views jumped from 800,000 in February 1998 to about 35 million in February 1999. Revenue ramped from $48,000 in the quarter ended January 31, 1998 to $2.1 million in the quarter ended January 31, 1999 I would say based largely on the popularity of dELIA’s, a brand iTurf sells aimed atyounger female buyers.

iTurf posted $464k profit for 1998 but that may not matter. Going forward I see marketing and advertising being expensive as it battles for marketshare. Overall iTurf’s focus could make it pop on IPO. But even iVillage and iTurf must get good at the art of the long view, staying in the game and making each quarter stand out.

IPOs Or IPG, Initial Public Gaps

“Steve, just read your comments on IPOs. I’ve watched IPOs for more than 30 years and have never seen such enormous discrepancies between the prices set by the underwriters and first day prices. Why do you think the underwriters of
Internet IPOs are unable to figure out what price the offering should command in the market?

Seems to me that either the underwriters must be idiots to miss the pricing by such huge margins; or perhaps a speculative frenzy explains the enormous discrepancies. Keep up your interesting work.”

Reply: The Chinese have an expression: may you live in interesting times. On the IPO pricing I believe that the underwriters know the demand is huge (from the book) but may also be pressured to not let unbridled capitalism have its way. Stay tuned for more on that front. The next 30 years may be different! And more interesting indeed.

Accolades for Internet Stock Report:

"Fresh and provocative" -CBS
Marketwatch, who named
Steve Harmon one of the top Internet stock analysts and only independent
one honored.

"I am a huge fan of Steve Harmon’s analysis."
-Kleiner Perkins’ John Doerr

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