Emailbag Monday: WIT, CNET, Valuations

First reader up this week writes:

“I like your analysis on the per user market value of the various Internet sites. But I have a few questions: I use a lot of these services so my personal market valuation would be over $15,000 I would imagine. Plus my cable values me at $5,000, my
newspaper at ???, my magazines, the air and radio waves at ???, etc.

I know I don’t do the impulse spending to justify all those values. So don’t we have a situation like that in the regular market where all individual analysts are saying their companies are going to grow at 10-15%, and the top down economists are saying, no the total growth can’t be more than 5%. There just isn’t room to justify all these valuations.”

Reply: Overall Internet industry growth drives the whole picture, which is more than 20% per annum in user growth. On one level an exponential value of a user does exist. In effect, as consolidation occurs you are being arbitraged from smaller to larger sites as Wall Street discounts ahead the notion that all roads lead to the consolidators (AOL, Yahoo, @Home, Microsoft, Lycos, Infoseek, etc.)

The gap in value exists only between you, your ISP, any given Web site or service, and the speed in which the mergers take place. As long as the market inefficiencies exist you may be double counted on a value basis but ultimately the consolidating site may find two or three times the revenue stream from a user.


“I bought CNET at 147. I have a tolerance for short-term corrections, as experienced last week, if in fact the company has a sound business model and talented management to execute it. What’s your impression of CNET as concept and its
management? Moreover, are there any macro signs out there that would cause (this) business models to falter?”

Reply: CNET (NASDAQ:CNET) at $3.95 billion seems fairly valued to me pending growth in its commerce initiatives. I like the company’s moves into commerce with computer sales and services, a natural fit for the brand and network. If Snap becomes more of a power then CNET could have some room to rebound. I am pleasantly surprised at CNET’s positive income and equity stakes in a few spinoffs.

Blue Chippers

“Have been advised that AOL, Yahoo, eBay (long aol, yhoo) will be the “blue chip” net stocks of future. Your opinion please. So nice to get straight forward answers.”

Reply: People often forget that AOL (NYSE:AOL) commands the largest Web audience across five platforms: AOL Online,,, ICQ and CompuServe. It is the largest ISP with 17 million subscribers on AOL and 2 million via CompuServe. AOL surpasses 50% Web audience reach. To me AOL represents the bellwether Internet stock.

Yahoo (NASDAQ:YHOO) has similar leverage but not as diverse (no ISP dial up revenue). Arguably both AOL and Yahoo are two of the Web’s best brands.

eBay (NASDAQ:EBAY), meanwhile, in my mind has the best business model I have seen using the Web–referrals for commissions. Basically eBay matches buyers and sellers and takes a cut without ever touching the goods, a very clean model with low overhead.

The revenue growth is a key signal that each of their businesses is viral and each is a pioneer in its space, a very powerful position to be in. Defining rather than following.


“What’s your take on the upcoming WIT Capital IPO and the DLJ Direct tracking stock?”

Reply: First of all I like the idea behind Wit Capital but haven’t been overwhelmed by its execution of the marketing and business plan. Too often I see Wit Capital trying to get a seat at the table for stock offers and the traditional bankers pushing them out. Goldman Sachs’ buying 22% of Wit to me takes it out of play but also gives it a traditional seal of approval.

Quite honestly, at this juncture Goldman ought to consider acquiring Wit outright and making Wit its tracking stock for Internet business.

DLJ Direct represents a little different opportunity to me. Tracking stocks are fine to a point but I favor pure plays, innovators and not the ‘me too’ stocks riding enthusiasm. That’s the challenge of large companies with Web assets, capitalizing them while selling enough of the company to the public to give them a say in its future.

Above, And Beyond?

“Steve, what is your opinion of AboveNet (ABOV), the Web-hosting provider? It is down about 45% from its high and just raised approximately $340MM in cash from a secondary, so it seems poised to go on another expansion spree. By the way, looking forward to reading your book when it comes out.

Reply: At these levels I prefer Exodus (NASDAQ:EXDS) or Applied Theory (NASDAQ:ATHY), although ATHY is a little too dependent on two customers for over half its revenue. AboveNet’s (NASDAQ:ABOV) cash position, looks attractive but I think its sales need to grow into its current valuation first.

Post script: Lycos’ (NASDAQ:LCOS) proposed merger with USA Networks may not be going through according to rumors we hear. That may open up the Web network to other deals of which I think CBS-CMGI makes sense. Stay tuned.

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