Pulse: CMGI Bitten Hard by Net Advertising Falloff

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In the unlikely event more proof was needed that Internet advertising is an unpopular basis for a business, they got it from incubator

CMGI

(CMGI)

.

CMGI confirmed the rumors today that have sent its stock up and down for the past week: It is selling or shutting down entertainment Web site

iCast.com

and advertising-supported Internet access provider

1stUp.com

by the end of January.

CEO David Wetherell made the announcement during a conference call after the market close today. CMGI, whose companies have suffered from the withering of Internet advertising, closed down $1.13 or 7.2% to $14.50.

Adams Harkness

downgraded the company from strong buy to buy earlier in the day.

Since the beginning of the year, CMGI's stock has lost more than 90% of its value, slashed by investors impatient to see its Web properties get profitable. No profitability was in sight for iCast and 1stUp -- and their drag on the company became unsupportable.

Wetherell also announced that Internet advertiser

Engage

(ENGA)

, in which it owns a majority stake, will be restructured. CMGI will take a charge of $8 million to $10 million for restructuring for the quarter that ended Oct. 31.

Company officials said remaining companies, such as search engine

Alta Vista

, would refocus on making more sales to business.

Other Internet plays, took a drop as well Tuesday.

TheStreet.com Internet Sector

index dropped 4.3%, as some of the biggest names in the index also had shares drop amid continuing concerns over advertising, traffic and an uncertain retailing holiday season.

Last Tuesday, rumors that CMGI would cut loose the cash hogs in its portfolio sent the stock bouncing more than 13%. When nothing happened by the end of the week, however, the stock had dropped 34%.

Wetherell called the moves "painful, but I think it's positive." He gave a tentative yes, when analyst David Dusenberry of

CS First Boston

asked if CMGI had "hit bottom when it comes to divestitures and close-outs."

Among other Internet players Monday, online retailer

Amazon

(AMZN) - Get Report

closed down $2.25, or 7.5% to $27.81.

While Jupiter Research

announced today that the number of online Christmas shoppers would go up 75%, with books and music popular categories, Amazon.com now has to pay attention to the larger retail climate -- and it's less certain, said analyst Daniel Ries of

C.E. Unterberg, Towbin

(his firm has done no underwriting for Amazon). Ries authored a study of

e-tailing traffic last week that indicated a possible weakness in sales.

eBay

(EBAY) - Get Report

dropped $3.19, or 6.9%, to $42.87 after Amazon announced it was launching a site similar to eBay's wildly popular

half.com

.

3:21 p.m.: Computer Makers Get Tossed All Over

Shares of several computer makers' initially headed south today, led by

Hewlett-Packard's

(HWP)

surprise announcement early this morning that its earnings for the fourth quarter fell short of analyst expectations by a dime a share. This big earnings miss fueled fears among investors who have already hammered the sector because of concerns about stagnating PC sales and possible price cuts that will further impact earnings.

H-P, as the company is known in investing circles, was lately trading off 13.6% to $33.86 after it said it earned just 41 cents a share instead of the 51-cent estimate expected by analysts who follow the company. It didn't take long for at least one analyst to swing into gear.

Credit Suisse First Bank Boston

downgraded the stock from buy to hold after Hewlett Packard's conference call about its earnings this morning.

The fallout? The

Philadelphia Stock Exchange Computer Box Maker Index

, which tracks the stocks of companies that make computers, was down about 4% earlier today. But, like many technology shares, it had lately climbed back to the plus side, lately gaining 0.4%.

In its morning call, H-P blamed the earnings miss on lower margins and currency problems in Europe. For other box makers (that's what PC makers are called by people in the know), two factors are at work: possible price competition that would increase sales but cut into profits and some downward nudging by investors worried that already flaccid estimates on PC sales might still be too high.

Hewlett-Packard is both an imaging (those printers that churn out copies of your favorite documents) and computer giant. Its competitors

Gateway

(GTW)

and

Compaq

(CPQ)

both dropped today. Along with the rest of the tech heavy

Nasdaq, however, both stocks were off their lows of the day.

H-P's announcement came after

Dell

(DELL) - Get Report

last week

lowered its guidance on growth expectations for the computer company's 2002 fiscal year.

One of the issues at play for Dell is the possibility that aggressive price-cutting could hit profits this quarter. Company founder and head Michael Dell raised the possibility at a meeting with analysts last week. Investors already have factored in Dell's news -- it is trading up (that's right, up) 9.8% after being hammered last week.

This earnings season is giving more credence to the belief held by some that we're seeing the end of the PC sector as a high-growth industry.

Gateway, which also dropped on Friday but has largely made it through this earnings season unscathed, may be exposed to increasing pressure. "Dell is clearly pricing more aggressively and Gateway is going to get more competition. That is the bulk of their revenues," James Poyner, analyst with

C.E.Unterberg, Towbin

said of Gateway and consumer PCs. "They're going to have a harder time making their revenue numbers, especially in Christmastime." His firm has no underwriting relationship with Dell or Gateway.

PC makers have indicated modest growth expectations for the quarter -- Compaq is counting on only 11% sequential growth, the same as from the second and third quarters. But given the current market performance, even these modest growth projections (by recent standards) can look too high to investors, said Dan Niles,

Lehman Brothers

influential analyst. (Lehman has no underwriting relationship with Dell, Gateway, Compaq or H-P). "Even though you've got low expectations, you get a little queasy. It's just human nature."

TheStreet.com

wrote a

separate story about how the PC sector's big players have been dropping like flies.