When a Onetime Highflier Fades From the Radar Screen

Talk about a disappearing act.

Former Silicon Valley highflier General Magic (GMGC Quote) took one step further out of the mainstream Monday when Goldman Sachs, the bank that underwrote its 1995 initial public offering, formally stopped paying attention.

"We are dropping coverage of General Magic as of today," analyst Michael Parekh told clients Monday morning in a one-line missive. The stock, which opened the week at 3 3/4, actually rose a bit Monday but fell amid Tuesday's Net-stock rampage to 3 21/32.

Why bother paying attention to mighty Goldman's dissing of a puny company like General Magic, with a market cap of $135 million? A few reasons: First, it shows that although sell-side analysts will stick with an investment-banking client for a very long time, they won't stick around forever. It also gives a window into what life is like for unloved technology companies that have little following on Wall Street. Finally, it's a bitter reminder to today's hotshots that a meteoric IPO, lots of buzz and plenty of cash don't guarantee success.

Sunnyvale, Calif.-based General Magic was like an Internet stock before the Internet mattered. It went public with a splash but began falling quickly almost immediately when it turned out that its proprietary communications system missed the advent of the Web. It's been struggling back ever since with a change in management, fresh cash from the likes of Microsoft (MSFT Quote) and a new voice-activated messaging service called Portico.

As recently as last August, when General Magic stood at 8, Goldman's Parekh continued to rate the stock a market outperformer. That's neither an overly bullish nor a bearish designation in Goldmanspeak.

General Magic is still trying. It's got a new Web portal at www.mytalk.com that provides free email that can be retrieved by phone. It recently signed a deal to provide similar voice-enabled services to customers of Excite @Home (ATHM Quote), which is investing $6 million. And it has more than $40 million in liquid investments, or more than $1 a share.

"Now it's all about generating revenue," says James McCormick, General Magic's operations and finance chief. McCormick suggests some additional analysts will pick up coverage of General Magic, though none will be of Parekh's caliber or even one rung below the Goldman analyst. "Parekh effectively dropped coverage a long time ago," says McCormick, adding that "I think we just don't fit their story model."

Parekh, who also follows TheStreet.com (TSCM Quote) (he rates it a market outperformer), didn't return a call. McCormick says General Magic will have "significant revenue in the second half of 1999."

That part of the year begins later this week. The question is, if General Magic does begin to generate revenue, will anyone notice?

Liking Lehman a Little

Tech-stock investors who follow Lehman Brothers' "Ten Uncommon Values" probably got a good chuckle from James J. Cramer's reminder that the annual summertime list is a good trading opportunity. For Cramer, Lehman's recommendation last year of Tyco International (TYC Quote) was worth listening to: Tyco's stock is up 47% since the end of June last year. The one tech play on last year's list also fared well: Semiconductor equipment maker Applied Materials (AMAT Quote) has more than doubled since making the grade.

Careful, though. Lehman's list is a huge success -- its picks have returned 50%-plus in the last year -- but it isn't perfect. The venerable investment bank chose computer component maker Adaptec (ADPT Quote) as one of its faves in 1997, and over the next 12 months the stock dropped from almost 35 to 14. It's now back at 35 5/8. And PeopleSoft (PSFT Quote), the now-beaten-up enterprise software maker, was a hit in 1997, moving from 26 and change to 47. It has since dropped to 17.

A Lehman spokesman cautions that the list is intended to be used strictly as a one-year estimate. He's justifiably quick to point out that America Online (AOL Quote) appeared on the list in 1996 at a split-adjusted 5.47 and again in 1997 at 6.95, adjusted for splits. AOL, not an uncommon value in 1998 at an adjusted 26.28, closed Tuesday at 105 7/8.

One last thing. Cramer noted that the Lehman listing is all about research without any intentional touting of investing-banking clients. That's probably true. Still, six of the picks in 1998 did public financings over the three previous years managed or co-managed by Lehman. In any event, the list's performance speaks for itself.

Lehman releases the 1999 version before markets open Thursday.

You Ask, I Answer

A fair question from John Canniffe of Chicago: What the heck is a "greenfields" network?

Greenfields refers to a system or factory that is built from scratch, as opposed to being added on to an existing facility. A brand-new site has the advantage of being designed from the ground up and not having to take into account the problems of previous generations. In this case, it refers to the networks being built by new-age phone companies like Level 3 (LVLT Quote) and Qwest (QWST Quote).

To understand the metaphor, consider two joint ventures from the 1980s between Inland Steel (now part of Ispat International (IST Quote)) and Nippon Steel. The duo built high-tech steel mills in the middle of what had been a cornfield in New Carlisle, Ind. They could afford to get away from the rusty, grimy integrated mills on Lake Michigan because the new facilities didn't need to ship in iron ore. By the way, my source on the crop planted in Indiana is my dad, a retired Inland exec: He was there.

And to the many readers who've ever-so-gently written to suggest I am clueless about free Internet service providers in Europe, you've made your point. I'll dive into the subject shortly and let you be the judge of just how "free" ISPs are over there.