Leaders Of The Pack: ISDEX Flat But Some Stocks Soar

Wall Street’s latest defatuation with Internet stocks came on the heels of a broad market injection of fundamental valuation techniques being applied at the knees and USA Network’s proposed merger with Lycos (NASDAQ:LCOS) that gave not only LCOS but Internet stocks a haircut.

The group of 50 stocks in ISDEX that represents the overall Internet industry in public companies was up a slight 2.3% since Dick Clark did the countdown ringing in the new year. The NASDAQ fared better with a 5.5% rise since 12/31/98 and the Dow lagged both indices.

Open Market
ISDEX ® 16-Feb-99% change
The Internet Stock Index closefrom
www.isdex.com  31-Dec-98
ISDEX  293.28 2.3%
NASDAQ  2,313.87 5.5%
DJIA  9,297.03 1.3%
Sportsline USASPLN$40.13158%
CNET CNET$123.50140%
E*TRADE EGRP$45.6995%
CMG InfoCMGI$99.0086%
Lycos LCOS$92.0066%
PSINet PSIX$34.5666%
Security First TechnologiesSONE$46.2552%
Mindspring MSPG$83.8837%
@Home NetworkATHM$95.7529%
Preview TravelPTVL$23.7529%
Network SolutionsNSOL$157.6320%
Earthlink NetworkELNK$67.2518%
Netscape NSCP$68.2512%
ISS GroupISSX$58.887%
America OnlineAOL$159.503%
24/7 MediaTFSM$28.381%
IDT CorpIDTC$13.47-12%
CheckPoint SoftwareCHKPF$39.00-15%
Open TextOTEXF$19.56-20%
Security DynamicsSDTI$17.38-24%
Cyberian OutpostCOOL$18.75-32%
Network AssociatesNETA$44.38-33%

Compaq’s $305 million cash buy of privately-held ZIP2, a provider of local Internet guides, may ignite the value debate again in favor of Internet stocks. Specifically, Compaq’s commitment, this $305 million added to the $220 million pending purchase of Shopping.com, shows how Compaq is investing to make AltaVista a more valuable Internet asset (with IPO to follow, probably).

Despite the overall market bashing individual Internet stocks outperformed the market with triple digit gains year to date, with merger mania pushing most of the top gainers up. One notable non-merger involved stock led the list, however. Sportsline (NASDAQ:SPLN) led all stocks in the ISDEX group with 158% pop to $40.125 per share, fueled by TV network CBS upping its stake in the Web-based sports content firm.

Sportsline will receive $100 million worth of ad time on CBS as part of a five-year deal that results in CBS getting an increased stake in SPLN. CBS owned 12% of SPLN and now will own about 18%, CBS could eventually own 27% depending on SPLN stock price (or how the folks at Black Rock, CBS headquarters, feel).

GeoCities(NASDAQ:GCTY) showed the kind of deal that Internet investors appreciate –with Yahoo (NASDAQ:YHOO) offering a premium for its users and reach in a $4.6 billion bid. Rumor had @Home (NASDAQ:ATHM) interested also but Yahoo had first dibs through a marketing agreement and small investment Yahoo had made earlier in GeoCities. At $4.6 billion in stock, Yahoo’s bid was 250x GCTY’s 1998 revenues or 153x GCTY’s fourth quarter revenues annualized.

Excite (NASDAQ:XCIT) rose 114% this year on its pending merger with cable Internet service provider @Home (NASDAQ:ATHM), which made a $6.7 billion bid for the popular Web guide. @Home’s stock offer for XCIT is 43x 1998 revenue or 31x fourth quarter revenue annualized.

For the three months ended 10/98, revenues for Lycos totaled $24.8 million. Annualized that’s $99.2 million. USA Networks valued LCOS at $6.6 billion (30% of a $22 billion combined entity), which implies a 66x latest quarter annualized revenue offer. On a multiple basis the offer looks in line with Internet deal multiples.

Remember also that LCOS shares ran on deal expectation since the Excite deal was announced. Even so, the key question in our minds is the value of USA Networks contribution to the merger. We don’t think it adds up to a 61% pro forma position. Wall Street agrees as LCOS shares have been hammered since the deal was announced just over a week ago. Even so, LCOS was up 66% year to date.

E*TRADE (NASDAQ:EGRP) managed to keep ahold of its stock rise this year, despite the glitches that prevented some of its customers to trade and angered them to boot. EGRP shares showed a 95% gain since 12/31/98 to $45.69 per share. E*TRADE ranks third in overall number of online accounts and just announced a new asset management division.

The one thing we’d like to see more out of E*TRADE is innovation and leadership in new products and maybe the asset division will produce that.

On the worst performers of the year, those stocks at the bottom of ISDEX with percent lost, our quick review sees that many of them compete in what looks like commodity-like businesses.

E-tail, in particular, got blasted with high flyer Amazon.com (NASDAQ:AMZN) even dropping.Software/hardware/auctioneer Egghead.com (NASDAQ:EGGS), auctioneer ONSALE (NASDAQ:ONSL), software e-tailer Cyberian Outpost (NASDAQ:COOL) all fell between 9% and 32%.

Device software maker Spyglass (NASDAQ:SPYG), which bet on the embedded browser market after Microsoft (NASDAQ:MSFT), and Netscape, dominated Spyglass’ original browser market in 1996-97. Microsoft at one point licensed Spyglass’ browser to jump start its own efforts.

Ancient history, however, as SPYG succumbed to as lower-than-expected rollout of the so-called Internet appliance market which it makes software for.

SPYG’s first quarter revenue ending December 31, 1998 was $4.5 million, up 6% vs. same quarter last fiscal year. Net loss for the quarter was 15 cents per share vs. 28 cents per share net loss in the previous year’s first quarter.

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