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.

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.

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