ISDEX Drops On Broad Market Musings


“Where Wall Street Meets The Web”

Last October we predicted a
20% to 30% correction in Internet stocks and so far this looks like it. ISDEX is off 22% so we
could be near the bottom here. Hints that may be true come from the buying we’re seeing in
select Internet stocks as those looking for bargains or more attractive prices start to
buy.

This same pattern occurred in July of last year and ISDEX rebounded in the next few
months to close the year strong.

The only bright spot in ISDEX for the period February 2 to February 10 was Security First
(NASDAQ:SONE), up 15% for the period. SONE gained on its fourth-quarter results that showed
strong sales, up 184% to $9.7 million vs. 4Q97. Full-year revenue was $24.2 million, up
123%.

Security First’s Internet-based applications for the financial services industry power
large banks Web efforts. Some 542,000 accounts now use its software, a 938% vs. 12/31/97. And
93,000 end users were processed through SONE’s data center, up 184%.

SONE’s losses continued,
however, with 1998 loss at $30.8 million or $1.96 loss per share before charges. With charges
loss per share was $2.80 for the year.

In ISDEX the biggest decliners were led by Lycos (NASDAQ:LCOS) which announced a merger with
USA Networks and Ticketmaster-Citysearch. The deal valued LCOS at $6.6 billion which we think
is a fair value.

However, LCOS shares got hammered two sessions in a row based on the math at
play here: the combined entity is not 100% Internet, it’s a hybrid cable-Internet outfit. And
cable programming or networks don’t command the same multiples as Internet companies.

So you
can’t assign a 30x revenue multiple to a hybrid media concern. Mature media such as USA
Networks (NASDAQ:USAI) trades on EBITDA cash flow. A typical cable cash flow multiple (or
broadcast multiple) would be between 10x to 15x cash flow on its best day. Hence the pounding
LCOS shares now take with the media multiple in effect.

Wall Street pays a premium for pure
play Internet assets because their growth is phenomenal. USA/Lycos could be an extremely
valuable firm going forward but they must execute now on the deal to draw out the value. It’s
always execution that means the most in mergers.


SPLN

ISDEX ®

 

10-Feb-99

% change

Point change

% change

The Internet Stock Index

 

close

from

from

from

www.isdex.com

 

 

02-Feb-99

02-Feb-99

31-Dec-98

 

 

 

 

 

 

ISDEX

 

282.12

-22.1%

-80.22

-1.6%

NASDAQ

 

2,309.50

-6.2%

-153.92

5.3%

DJIA

 

9,177.31

-1.0%

-96.81

0.0%

 

 

 

 

 

 

Security First Technologies

SONE

$37.06

15%

$4.94

22%

OpenText

OTEXF

$20.75

1%

$0.25

-15%

Concentric

CNCX

$43.38

0%

$0.00

30%

Egghead.com

EGGS

$16.88

-2%

-$0.31

-19%

Open Market

OMKT

$13.19

-4%

-$0.50

13%

IDT Corp

IDTC

$14.25

-4%

-$0.56

-7%

CheckPoint Software

CHKPF

$41.50

-6%

-$2.56

-9%

Axent

AXNT

$33.00

-6%

-$2.06

8%

Sportsline USA

$34.88

-6%

-$2.25

124%

USWeb

USWB

$31.06

-9%

-$3.25

18%

America Online

AOL

$150.88

-10%

-$16.63

-3%

Netscape

NSCP

$63.88

-10%

-$7.06

5%

Beyond.com

BYND

$23.69

-10%

-$2.69

14%

Broadcom

BRCM

$115.50

-10%

-$13.25

-4%

VocalTec

VOCLF

$12.25

-11%

-$1.50

9%

Inktomi

INKT

$54.50

-11%

-$6.81

-58%

Amazon.Com

AMZN

$97.44

-12%

-$12.81

-9%

Yahoo!

YHOO

$142.38

-12%

-$19.09

20%

Broadvision

BVSN

$35.25

-12%

-$4.75

10%

Verio

VRIO

$28.00

-12%

-$3.81

25%

Exodus

EXDS

$79.00

-12%

-$11.06

23%

Cisco

CSCO

$98.56

-12%

-$13.83

6%

Broadcast.com

BCST

$124.50

-13%

-$18.50

63%

Network Associates

NETA

$43.13

-13%

-$6.63

-35%

GeoCities

GCTY

$89.75

-14%

-$14.19

167%

ISS Group

ISSX

$51.50

-14%

-$8.63

-6%

RealNetworks

RNWK

$59.19

-14%

-$9.94

65%

@Home Network

ATHM

$96.13

-15%

-$16.38

29%

N2K

NTKI

$13.44

-15%

-$2.31

3%

Verisign

VRSN

$81.00

-15%

-$14.44

37%

Excite

XCIT

$89.88

-16%

-$16.50

114%

Preview Travel

PTVL

$23.31

-16%

-$4.44

26%

Spyglass

SPYG

$11.00

-16%

-$2.13

-50%

eBay

EBAY

$212.00

-17%

-$42.25

-12%

PSINet

PSIX

$33.25

-17%

-$6.75

59%

CyberCash

CYCH

$12.50

-17%

-$2.56

-17%

Onsale

ONSL

$35.25

-18%

-$8.00

-12%

Security Dynamics

SDTI

$16.88

-19%

-$3.88

-27%

24/7 Media

TFSM

$29.75

-20%

-$7.25

6%

Doubleclick

DCLK

$79.75

-20%

-$20.25

79%

CDnow

CDNW

$17.50

-21%

-$4.56

-3%

CNET

CNET

$91.31

-24%

-$29.19

77%

Earthlink Network

ELNK

$57.31

-24%

-$18.44

1%

Network Solutions

NSOL

$153.88

-25%

-$51.63

18%

CMG Info

CMGI

$92.06

-27%

-$33.31

73%

E*TRADE

EGRP

$42.75

-27%

-$15.50

83%

Mindspring

MSPG

$71.63

-27%

-$26.38

17%

Infoseek

SEEK

$54.00

-28%

-$21.16

9%

Cyberian Outpost

COOL

$18.31

-29%

-$7.44

-33%

Lycos

LCOS

$87.25

-35%

-$46.69

57%

The drivers or detractors for Internet stocks take cues from the big boards. What caused the
selloff in Internet stocks this time around wasn’t any lack of earnings or huge losses,
glitches or bugs in the Internet. It was a broad-based market muse.

Specifically, a few
wild-eyed comments from Prudential that the overall stock market could correct 5% to 10% did
little to the Dow but did zap Internet stocks more than 20% the past week as investors,
speculators and others sought solace from the prophets of doom.

Prudential Securities
technical research director Ralph Acampora was the oracle de jour on this as he double spoke
his way through an investment conference last Tuesday with comments picked up by Reuters that
“I told everybody I think the Dow has a primary target of 9,800 this year and perhaps more, of
about maybe 11,500 by the end of the year.”

On the 5% to 10% correction he forecasts he
explained it with “I think it’s a correction in a new bull market that began in October 1998.”
That sort of gobblygook econo-speak must have had them tearing up at the conference. A new bull
market? Most observers would say the old bull market just took a breather or the bull simply
had to renew its legs.

And his prediction for the Dow has a 1,700-point range in his guess,
from 9,800 to 11,500. The reality is that Wall Street was looking for a reason to slam tech and
Internet stocks especially and Acampora became the convenient trigger, no matter what his
actual guesstimates or comments were.

The real driver for the whole ISDEX has and we think will continue to be consolidation,
especially in the top 11 through 25 sites. Any number of combos could emerge from this group
and challenge the top 10 in ways they know not. The market is just heating up. With the 22%
decline ISDEX has seen we believe bargain buying may start soon.


Internet startups alert! make your pitch to the top venture
capitalists at Internet Startup Live! Venture Showcase at Spring Internet World, Los Angeles –
where Silicon Valley meets the Digital Coast! click here for details


Harmon’s HotWatch ’99 – the hottest analysis about Internet stocks delivered to your
email box each month! Last year’s 10 to watch from Steve Harmon was up 300%. Will 1999 be a
repeat?

More info click here


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

News Around the Web