January 8, 1999 1:20 PM PST

Analysts send mixed signals on Net stocks

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January 5, 1999
Forget about MTV. I want my Internet.

A majority of those polled in recent study said that if they were stranded on a desert island, they would prefer a computer with an Internet connection rather than a telephone or a television.

Mary Meeker, an influential Internet analyst at Morgan Stanley Dean Witter, pointed to that finding in forecasting a strong year for Net stocks in 1999. In her most recent report, dubbed "Internet/PC Software: It Can't Get Better than This, But it Can Still be Pretty Good," she rated 1999 as an "outperform" year.

Indeed, Internet-related stocks continue to burst at the seams in the new year, driven by frenzied enthusiasm over holiday e-commerce sales and high expectations as earnings season kicks off next week.

Still, not everyone agrees with Meeker, the analyst voted #1 by the 1998 Institutional Investor survey.

Mixed signals abound, with some of Meeker's colleagues predicting a decline in Net stocks in the future, even going so far as to recommend short-selling. Others speculate that the Internet blue chips have nowhere to go but up.

Michael Murphy, chief investment officer of Murphy Investment Management and the editor of the California Technology Stock Letter, speculated that Net retailers' stocks will fall sooner rather than later. And he's putting his money where his mouth is, taking short positions in several Internet stocks.

So-called short-sellers make a profit by borrowing stock certificates to sell, anticipating that the share prices will fall. They count on buying more shares at a lower price later, or repaying their initial loan with the lower priced-shares.

Echoing the sentiments of many others that Internet issues are overpriced, Murphy is short-selling stock in book, music, and video e-tailer Amazon.com, as well as in online giant America Online and Web portal Lycos.

Despite the surge in Internet-related revenue over the holiday shopping season,

Most Internet stocks jump
Stock Closing price Percent gain
Lycos 91.75 28
Excite 60 8
Yahoo 343.625 7
Broadcast.com 197.5 50
Preview Travel 22.125 14
Murphy is skeptical about the profit potential of e-commerce companies in the long term, contending that they remain stuck in a low-margin, cut-throat landscape.

Then there are the bulls.

Morgan Stanley's Meeker wrote that 1998 was the year the Net came of age, and that 1999 will only see it blossom further.

She noted that, in 1998, the "Nifty Nets"--the handful of leading, large-cap, Internet-related companies whose shares and business fundamentals have significantly outperformed most other companies and even the major indexes--put on a stunning performance. As of December 7, 1998, America Online had surged 275 percent; Yahoo rose 292 percent; and Amazon.com an eye-popping 534 percent.

By comparison, 1998 saw the S&P 500 climb 20 percent, the Dow Jones Industrial Average jump 15 percent, and the Nasdaq leap 57 percent (partly as a result of the many tech stocks included in the index).

"Going forward, we remain bullish about Internet fundamentals," Meeker wrote, noting that "if many of the leaders continue to execute, and the theories of Internet-related benefits" hold true with increasing returns, shares of leading Net issues actually will seem cheap in the future.

Meeker said she continues to believe in the potential of Internet stocks, because the opportunities at stake seemingly are limitless.

She noted that, for her, the primary factors to consider when determining the strength of a company are how big of a market is it in, how high its market share is, and who is No. 1 in its sector. Using the book market, whose annual revenue is $85 billion, as an example, Meeker pointed to Morgan Stanley's estimate that between 2 percent and 10 percent of that revenue will move online during the next two to ten years, meaning $8.5 billion is up for grabs by e-commerce companies. Meeker pointed out that Amazon.com's market share currently is up to 90 percent, allowing it to pull in a significant chunk of that $8.5 billion.

Meeker certainly is not alone in her enthusiasm for Net issues. BancBoston Robertson Stephens's Keith Benjamin suggests building and holding a portfolio of the "biggest and best," as well as a few emerging franchises.

In his weekly study, "The Web Report," Benjamin wrote that, just last week BancBoston Capital was "concerned about [Internet] stocks languishing after the reporting season," but that Amazon's continued climb since has changed that outlook.

The fact that Amazon is up some 48 percent this week "is the clearest sign we have seen for continued strength in this stock group, even if company reports don't exceed the high end of inflated expectations," he said.

Benjamin also is bullish on America Online, calling it "the biggest Web mall."

"We believe the December quarter will be the best in AOL's history across all metrics, and would continue accumulating the stock," he wrote.

Other Net-related stocks for which Benjamin has hopes are Excite, CNET: The Computer Network (publisher of News.com), and SportsLine. He said that these companies did not fully recover from the market's downturn this summer, but that he sees opportunities ahead if they post "relatively upbeat reports."

Other facts that support the Internet bulls can be found in the "America Online/Roper Starch Cyberstudy 1998," which also produced the desert island statistic.

The study found that 71 percent of online consumers say they regularly or occasionally go online to get information about products they are interested in buying--both from etailers and brick-and-mortar retailers.

And more than 77 percent of those polled believe that being online actually has made their lives better.

"This new Cyberstudy reaffirms our belief that the Internet has come of age," Meeker wrote, adding that "it's only the second or third inning of the evolution of the Internet.

Bloomberg contributed to this report.

 

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