eMailbag: Readers Ask “What’s Hot & Not In Net Stocks?”

First reader up this week asks:

“I’d like to know what metrics are used to value Yahoo! and
Excite (or search engines in general). It seems that Yahoo! trades at
something like 50x sales while Excite is 10-20 times sales. Is this an
‘arbitrage’ opportunity or is there something else (besides Yahoo! being
No. 1) that makes these valuations seem out of whack?”

Reply: “Out of whack” is in the eye of the beholder. Market leaders
usually command a premium to their peers. We use several metrics to
evaluate Internet firms including: market capitalization to sales, price to
earnings (if any), market cap to users (which we invented), market cap to
page views (which we also invented), market cap to ad views (which we also
invented), discounted earnings modeling, market size and global potential,
capital, access to capital, debt, management, historical performance,
alliances, revenue streams, and maybe a few more.

What Are These Worth?

“I’ve invested in DCLK and EXDS at 30.75 and 25 15/16 respectively. Since
then, they have both been on massive swings of +30% or more. Recently, they
dropped back and I feel that they may not be well looked upon. Any
suggestions on the long term prospects of these two?”

Reply: We don’t give target prices for stocks but prefer to analyze
the firm and let readers make up their own minds. In general we prefer to
think of stocks as companies, not target share prices.

Egghead

“When reviewing your ISDEX, I noticed that EGGS (Egghead.com) is the only
stock without a research report (as listed on Yahoo!). Any
comments/analysis on EGGS?”

Reply: See the February
5th edition of Internet Stock Report for our initial take on Egghead’s
move to be 100% Web-based. Overall we’re optimistic that Egghead may do
well on the Web.

More Trade

“Why is E*TRADE on the ISDEX list while Ameritrade is not?”

Reply: ISDEX, Internet Stock Index, is a representative index of
Internet stocks, not a comprehensive listing. However, Ameritrade
(NASDAQ:AMTD) is on our ISDEX candidate list and may be added at a future
date. We still watch it.
More Trade

“How high up do you think E*TRADE’s going to go in the short run? Is
Infoseek a buy going into an earnings report? What three net stocks have
the greatest upside in the short run? Can you and your staff walk on water?
(Smile)”

Reply: We think that the bricks and mortar banks may start looking
to the Net-based banks/investment firms for growth once the banking merger
mania–on the analog side–subsides.

BankAmerica and NationsBank just announced a $60 billion merger. Citigroup
was formed from Citicorp and Travellers. On Infoseek (NASDAQ:SEEK) we
expect some strong revenue but aren’t as confident on earnings yet.

Which three Net stocks have the greatest upside in the short run? As soon
as we’re walking on water we’ll let you know. However, it may be
interesting to check out our top picks to watch for 1998–see ISR March
27. And we’ll be doing another “ones to watch” with perhaps some new
stocks soon!