Internet Stocks, Part 2

November 1, 1998

Friday's close: Dow 8592, S&P500 1098, NASDAQ 1771
October 25:     Dow 8452, S&P500 1070, NASDAQ 1693
July peak:      Dow 9337, S&P500 1186, NASDAQ 2014

The secondary rally continued (remarkably) last week, with the Dow up 1.6%,
the S&P up 1% and the NASDAQ up 4.6%.  The Dow is now only 8% off its
all time high.  I still see this as a rally in a primary bear market.
Even if it doesn't turn out that way, this is definitely not the time
to buy - wait for the next reaction.

Let's have another look at those Internet stocks, now that all their
earnings are out.  I've revised my list to only include companies that
sell stuff over the World Wide Web.  All these companies think of
themselves as being in the knee of a hockey stick shaped growth curve.
Their common goal is revenue growth - only the biggest will survive the
shakeout that is sure to come.  Since most lose money now, the price
to sales ratio is the basic valuation measure that I use.  Most of these
companies could easily turn a profit by not spending so much on expansion,
but to do so would be a bad strategy move at this point.

Symbol & Name    Price  PS %July   Rev   Earn   Cash NoCash RvGrw StGrw
CDNW CDNow           7   2  18%   13.9  -12.8   59.6  11/99  255%  119%
NTKI N2K             5   2  15%   10.5  -24.0   54.3   4/99  194%  361%
ONSL Onsale         18   2  50%   57.8   -3.3   49.0   5/02  130%   14%
AMZN Amazon.com    126  14  86%  153.7  -45.2  337.3   8/00  306%   10%
XCIT Excite         38  14  69%   44.0   -6.8   40.3   3/00  176%   62%
SEEK InfoSeek       29  14  64%   19.2   -2.6   54.5  11/03  129%   19%
LCOS Lycos          40  23  75%   19.0   -5.8   39.6   4/00  152%   31%
BCST Broadcast.com  49  52  66%    4.5   -3.9   58.1   6/02  134%   42%
EBAY Ebay           83  59 177%   12.9   +0.9   74.5    N/A  787%   25%
GCTY Geocities      29  62  57%    5.3   -4.1   99.9   9/04  316%   48%
YHOO Yahoo!        130  77 130%   53.6  +16.7  432.1    N/A  196%   11%

PS is price/sales ratio, %July shows how much the stock is off the July
peak in the market, revenues, earnings and cash are in millions (all as
of latest quarter except Lycos which reported 7/31/98).  NoCash is a
simple projection of when they'd run out of cash if they continue to lose
money at the current rate and don't raise any more.  Revenue growth is
for the latest quarter vs. a year ago, and stock growth is the growth
in common shares outstanding vs. a year ago.

CDNow and N2K are both CD retailers and they've recently agreed to merge.
While their P/S is very reasonable and they are growing revenue rapidly,
they are also losing money at a high rate and project to run out of
cash sometime next year.  They've issued a lot of new shares too, and
are way off their summer peak.  Amazon's recently expansion into CDs is
hurting them.

Everthing looks great for Onsale, except that they aren't growing as fast
as one would like - in this crowd 130% growth isn't up to snuff!

Amazon looks like the emerging blue chip of this group.  They are by far
the biggest, growing fast, with plenty of cash on hand.  P/S ratio is
lower than Microsoft's PS of 17, so not too pricey either.

Excite, Infoseek and Lycos are all in a similar business - Internet portal,
search and outline sites, plus whatever doo-dads they can cook up to add
on.  While they look OK from a financial point of view, they are competing
with Yahoo! which is larger and growing faster.  Maybe they'll merge with
each other, but I don't see how they can combine their businesses without
losing customers to Yahoo!.

Broadcast.com, Ebay, Geocities and Yahoo! are all doing great, but they are
all just too darn pricey for me.

So bottom line, I like Amazon.com the best.  But don't buy now - wait for
the next reaction to take it down into double digits.  This is one of the
most volatile stocks traded and it can really drop fast.

Richard Gillmann (richard@nwfolk.com)
Back