Pulse: Net Stocks Ride Against Nasdaq's Downward Current

On a day that the Nasdaq saw some solid profit-taking, Internet stocks outperformed as tech investors looked for some bargains in the beaten-down sector.

The Nasdaq ended the day down 91.15, or 2.15%, at 4143.18, hurt in part by a downgrade of Intel (INTC). The chipmaker finished the session down $4.69, or 6.3%, at $69.25. But TheStreet.com Internet Sector index rose above the fray to close up 22.11, or 2.6%, at 868.81. Some traditional Net names performed well, as did select business-to-business plays.

Net/Tech Indices INDEX CHANGE % VALUE TSC Internet 22.11 +2.6% 868.81 TSC E-Commerce 0.71 +1.5% 46.68 TSC E-Finance 0.88 +1.8% 50 5/32 Nasdaq 91.15 -2.2% 4143.18

The biggest news in the sector was the performance among Web hosters after WorldCom (WCOM) agreed to buy telecom provider Intermedia Communications (ICIX).

Intermedia is the controlling shareholder for Web hosting company Digex (DIGX), which has been on the block and was a target of Exodus Communications (EXDS).

Exodus ended the day down $3.38, or 5%, at $62.81, amid disappointment that it was not the acquiring company. As analysts at Morgan Stanley Dean Witter pointed out in a note, Exodus has rallied on hopes that it would strengthen itself through the purchase of Digex. Morgan analysts indicated that Exodus could fall between 15% and 25% in the near term, so today's price action had to be considered a positive.

But Digex closed down a sharp $16.63, or 20%, at $67.88. Morgan also lowered its rating on Digex to outperform from strong buy, in part because the acquisition price was below where the stock was trading on Friday. Digex also has had a huge run of late in anticipation of being acquired, and the fact that it was not an all-out buyout of the company likely was a disappointment to some shareholders.

The deal did aid some other Web hosters on hopes they would become acquisition targets. NaviSite (NAVI) closed up $2.38, or 5.3%, at $47.06, while Interland (ILND), a Web hoster targeting small businesses, closed up 59 cents, or 9%, at $7.19.

A number of traditional Net names were making headlines as well. America Online (AOL) closed down 63 cents, or 1.1%, at $57.13 on news that the Federal Trade Commission was asking AOL and Time Warner (TWX) for major concessions before it will grant approval to their proposed $129 billion merger. The FTC reportedly has concerns over access to high-speed cable lines that Time Warner currently controls, but as our own George Mannes wrote in an earlier piece, there is little to suggest the merger runs the risk of falling apart.

Excite@Home (ATHM), which also offers high-speed digital access and would benefit from open access, finished up $2.31, or 16%, at $16.81.

Also among Internet bellwethers, Yahoo! (YHOO) ended up $3.19, or 2.8%, at $117.13 and may have led the rest of the Internet sector higher. At one point today, it traded as low as $110.38. The stock finally saw some relief after being battered last week over concerns regarding a slowdown in Internet advertising. Both First Union Securities and US Bancorp Piper Jaffray came out in support of Yahoo! today.

Amazon.com (AMZN), another beaten-down Net name, closed up $4.19, or 10%, at $45.69, while eBay (EBAY) climbed $4.63, or 7.4%, at $67.50.

B2B stocks also continued their rally from last week amid ongoing hopes that the sector will continue to show good growth this quarter. PurchasePro (PPRO) gained $5.13, or 9%, to $62.63; Commerce One (CMRC) added $3.25, or 5%, to $69.25, though it traded as high as $73.31; and FreeMarkets (FMKT) climbed $4.69, or 5.7%, at $87.56, though it traded as high as $92.06.

2:05 p.m.: Nasdaq Down in Afternoon Trading

The Nasdaq may be down today, but don't bet that it's out.

Despite today's losses, the technical outlook remains positive, says Dick Dickson, technical analyst with Scott & Stringfellow. He said the market was likely seeing some profit taking that he expects to be brief.

Net/Tech Indices INDEX CHANGE % VALUE TSC Internet 15.02 +1.77% 861.72 TSC E-Commerce 1.09 +2.37% 47.06 TSC E-Finance 0.81 +1.65% 50.09 Nasdaq 51.5 -1.2% 4182.8

The Nasdaq was down 51.5 to 4182.8 in recent trading. TheStreet.com Internet Sector index was up 15.02 to 861.72. Weakness in Intel (INTC) after it was downgraded by US Bancorp Piper Jaffray was being blamed for much of the weakness in techs.

"Liquidity appears to favor an up month with good cash flows into mutual funds, a rise in the average mutual fund cash position, a relatively light IPO/secondary calendar and continued cash merger and acquisition activity," Dickson wrote in his morning briefing. "So bottom line appears to be that there could be some minor weakness immediately ahead, but overall it looks as though the market should move higher over the next few weeks probably led by the tech stocks."

Those investors who bought Lycos (LCOS) last week amid talk that its merger with Terra Networks (TRRA) was progressing, were disappointed today. The Internet portal was down 3% after Lycos Europe reported a large loss for the current quarter. Losses, which totaled 99.7 million euros or $89.4 million, were blamed on increased sales and marketing costs.

Salomon Smith Barney began coverage of a number of business-to-business stocks today. Salomon initiated coverage of B2B leader Ariba (ARBA) with a neutral rating; i2 Technologies (ITWO) with an outperform rating; Commerce One (CMRC) with a buy; WebMethods (WEBM) with an outperform rating; and Oracle (ORCL) with a buy rating. Ariba was up 1.8%, i2 was climbing 4.2%, Commerce One was jumping 10.7%, WebMethods was inching 0.9% higher and Oracle was down 1.1%.

Elsewhere, a couple of stocks were moving ahead of analysts' meetings. Art Technology Group (ARTG) was up 10.8% ahead of its analyst day on Thursday. Art Technology provides Internet customer relationship management software. InfoSpace (INSP), which won't hold its analyst day until Sept. 14, was up 8.7%.

Chase H&Q analyst Jack Ripsteen said the analysts' day will give InfoSpace an opportunity to showcase its acquisition of Go2Net (GNET). InfoSpace is a content provider to portals and destination sites. It agreed to buy Go2Net in July. Go2Net is a network of web sites.

"We believe the Go2Net acquisition has been largely misunderstood and discounted and believe that investors should come away from the analyst day with a better appreciation of Go2Net¿s business and management team," Ripsteen wrote. Chase has done underwriting for InfoSpace.

10:54 a.m.: Tech Struggling in Early Action After Long Weekend

Those of you just returning from vacation missed out on a pretty solid rally last week, though you would never know that from today's price action.

Net/Tech Indices INDEX CHANGE % VALUE TSC Internet 1.03 +0.12% 847.6 TSC E-Commerce 0.71 +1.54% 46.66 TSC E-Finance 0.25 +0.51% 49.53 Nasdaq 75.7 -1.8% 4163.5

In early trading, the Nasdaq Composite was down 1.7%. TheStreet.com Internet Sector index was up slightly to 848.

There was plenty of news among new economy stocks, particularly among the hosters after WorldCom (WCOM) said it would buy telecom provider Intermedia Communications (ICIX) for close to $3 billion in cash as well as payment of more than $3 billion in Intermedia's debt.

Intermedia is the controlling shareholder for web hosting company Digex (DIGX). Exodus Communications(EXDS) had also bid for Digex previously so it was seen as the big loser in the deal. Morgan Stanley Dean Witter lowered its long-term growth expectations for Exodus and its price target to $75 from $95, indicating that the stock could fall between 15% and 25% in the near-term. It was down only 5% today.

Camp wrote that much of Exodus' recent run-up could be attributed to expectations that it would emerge the victor in the battle for Digex and the integration of Digex into WorldCom's UUNet subsidiary "could result in a formidable adversary for Exodus. However, Camp wrote that "once the dust settles," he would recommend buying Exodus as it remains in the strongest position in the hosting industry. Morgan Stanley Dean Witter has done underwriting for both Exodus and Digex. Note that NaviSite (NAVI), another Web-hosting company, was up 4.2% on the news as it is a possible buyout candidate as well.

Camp also lowered his rating on Digex to outperform from strong buy, noting that the acquisition price implied a value for Digex of $84.50, which was an estimated 5% below its value as of Friday. In addition, he wrote that Digex has had a nice run since Intermedia announced it was placing Digex on the block.

Also in the web hosting field, AT&T (T) announced that it had signed a $450 million deal with IBM (IBM).

Elsewhere, shares of beleaguered Yahoo! (YHOO) were showing a little life following some positive research. The stock has suffered from concerns over a slowdown in Internet advertising spending. First Union Securities came to Yahoo!'s defense, saying that Yahoo!'s exposure to financially questionable companies was less than 10% of its advertising revenue.

Analyst Carolyn Luther Trabuco wrote that traditional advertisers, which ultimately are the "choice" long-term customers, are allocating more dollars to performance-oriented online buys. Yahoo! was recently up 1.2%.

Also among traditional Internet stocks, America Online (AOL) was down 1.8% on news that the U.S. Federal Trade Commission is asking AOL and Time Warner (TWX) for major concessions before it will grant approval to their proposed $129 billion merger. The FTC reportedly has concerns over access to high-speed cable lines that Time Warner currently controls.

GoTo.com (GOTO) was up 16% on news that it had agreed to a $50 million with AOL to distribute GoTo's pay-for-performance listings on the search results pages of AOL. The service gives sites better placement in search results for a fee.

In the business-to-business space, Ariba (ARBA) was up 0.9% on reports that it would team with IBM and Microsoft (MSFT) to introduce a new electronic publication standard to simplify B-to-B e-commerce transactions.

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