Portals: Old Dogs, New Tricks, New Name

“Portals” are back in favor with investors amid the proposed “merger of
the century” between America Online (AOL)
and Time Warner (TWX).


The hubs, or networks as they should now be called, are recovering from
a rough year in 1999, after blossoming in 1998. In 1999, investors grew
increasingly skeptical over these companies’ primarily advertising
driven revenue models, lofty valuations, and the inevitable downward
trend in growth drivers such as the percentage growth of new online
users in the U.S.

But opinions are changing. Investors and consumers were certainly
surprised to learn that AOL will own 55 percent of the merged company,
despite delivering only 20 percent of the combined revenue and less than 1/3 of
the combined cash flow.


Indeed, in this new era of online convergence
among PCs, televisions and even house-hold appliances, online networks
with large user-bases, tremendous reach and proven revenue channels are
once again looked upon as the platform for the future of integrated
media. “Old media, meet your new boss,” wrote one journalist following
the “merger of equals” between AOL and Time Warner.


Portals, it seems,
are now viewed as drivers of growth for rich media oriented offline
companies such as Time Warner. For [email protected], it appears these
online networks are the foundations for the future of media.

All of this attention makes it a perfect time to introduce investors to
one of the most under-valued and overlooked Internet stocks, Lycos
(LCOS).
Often labeled as a portal along with Yahoo! (YHOO),
The GO Network (GO),
and other competitors, Lycos would be better tabbed as a media empire with
a strong, consolidated network of sites. The company’s properties
include Lycos.com, Lycos Europe, Lycos Japan, Tripod.com, WhoWhere
Network, SearchCity.com, and Peoplefind.com. Media Metrix ranks the
Lycos network fourth in reach (reach is the percentage of all online
users who access a site or network of sites at least once during a
month), behind AOL, Yahoo! and Microsoft
MSN
(MSFT).

The stock may be attractive for the following reasons: 1) relative
value, 2) prey premium, 3) International expansion and 4)-model success.


Company Unique Users
per Month

(millions)
Reach
Percentage
America Online 44 68%
Yahoo! 42 65%
Microsoft 38 59%
Lycos 29 45%
Source: Media Metrix, November 1999 Web Ratings

Relative Value
Relative to other networks and especially other Internet stocks, Lycos
is under-valued. Just look at the network’s value-per-user (market
cap/# unique users) compared with rivals such as GoTo.com (GOTO).

Dividing Lycos’ market capitalization, $7.359 billion, by its unique
users, 29 million, [email protected] found that the market is currently
valuing each Lycos user at approximately $254. Meanwhile, the value of
GoTo.com — a site with less than 15 percent reach — users is almost
$500 a piece. And while roughly 7 out of 10 U.S. Web users choose to
surf at Yahoo! while 5 out of 10 choose Lycos, Yahoo!’s users are valued
at roughly $2,143 each — a substantial and probably unwarranted premium.

Deutsche Banc Alex. Brown reiterated its “strong buy” rating on Lycos
recently and the firm continues to believe the stock price will double
from its current level of around $80. Interestingly enough, the stock
is rated a “buy” or “strong buy” by 17 of 19 analysts surveyed by Zacks
Investment Research.

Prey Premium
In February 1999, CMGI’s (CMGI)
David Wetherell blocked the purchase of Lycos by Barry Diller’s USA Networks (USAI).
Investors liked Wetherell’s stand, after Lycos stock had quickly lost
one-third of its total value following news of the acquisition. Lycos
should be the next major online network to merge or be acquired and this
time the deal will have to support and accelerate the stock’s Internet
market value. The network’s robust user-base and audience reach is
attractive to all large online and offline media companies. Possible
predators include News Corp. Ltd
(NWS),
CBS-Viacom, and Amazon.com (AMZN).
Also, don’t rule out a deal with a broadband access provider (I wonder
if Earthlink is listening) looking to wrap content, community, and
“stickiness” around its pipes. CMGI’s 16 percent stake in Lycos will
of-course continue to play a pivotal role.

International Expansion
Lycos Europe, a joint venture with Bertelsmann will most likely IPO this
year. The company also operates Lycos Asia (a $50 million venture with
Singapore Telecom), Lycos Korea, Lycos Latin America and Lycos Japan.


International expansion is crucial for consumer oriented Web companies
as domestic growth drivers inevitably slow down. Lycos has positioned
itself for global growth that will increase its mind share, market share
and revenue channels.

Model Success
Lycos has a lot of content and services, a lot of users and tremendous
reach. Also, unlike the majority of Internet companies, Lycos is
proving that it can monetize its large network of content and strong
user-base. Launched on Oct. 25, 1999, the Lycos network’s shopping
destination, LYCOShop, is currently renting storefronts to over 2,400
commerce partners. Retailers include The Gap, Brookstone and Eddie
Bauer. Lycos recently announced that the number of online shoppers at
its site during the holiday season increased 450 percent compared to the
previous year.

The company’s most recent deals involved the acquisitions of finance
site Quote.com and interactive game site Gamesville.com. Lycos also
announced that it will deliver its content to Ericsson’s (ERICY)
wireless devices — A strategic move when you consider that Ericsson
controls roughly 40 percent of the world’s mobile phone market.

Lycos has certainly reached a point of “critical mass” for consumers,
advertisers and commerce partners; the network of globally branded media
properties had total revenues of $56 million for the three months ended
10/99, up

from $24.8 million in the previous quarter.


Investors can
expect tremendous revenue growth, narrowing losses and stock price
appreciation in the future for Lycos.

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