TheStreet.com held its Net Stock Summit last Friday in its lower Manhattan offices. This is the sixth and final installment of the edited transcript of the Summit, which TSC has been publishing throughout the week. (Click for Part 1, 2, 3, 4 and 5.) In this segment the panelists detail their stock picks and take questions. An archived audio version of the Summit is available here.
We're gonna go through the stock picks now everybody submitted beforehand. I'll identify each person to have them talk briefly about their pick and then take a couple questions from the people around the table maybe to spark a little more defense rather than just outright promotion.
So let's start with
. Ryan's pick is a company that one of our readers emailed in and said, "I'm really not sure what the heck they do, but their stock seems to do well," and that's
. Could you tell us a little bit about that company, or more accurately, just a little bit about why that's your pick?
Well, CMGI is basically a publicly traded venture capital fund. I mean, that's really the best way to describe it. Why do we like it? It's been a holding of ours for a while and one of our top holdings for a while. You know, people ask me if I had to own one Net stock, what would it be? And that would be it because you're getting exposure into -- you know, the problem is even with
or one of the other larger Internet companies, the risk isn't the quarter-by-quarter risk.
The risk is really: What happens if a technology comes along that co-opts that market? And that's a big risk, and that could mean that business disappears, whether it's
or something else down the road that we're not seeing. So that's the risk that I worry about. With CMGI, in essence, you're buying into really 30 different companies, encompassing a variety of different businesses, a variety of different technologies. I feel very comfortable.
Another thing is I think it's very misunderstood by the Street, again, because, you know, most of the companies are privately held. They're really almost impossible to value. So you have to take a more holistic view in looking at these companies, trying to see maybe public counterparts or market sizes and where this company could go. And with CMGI, because they have a pretty vast network, in essence they can help bring a company along, introduce this new company to customers right off the bat, get them to that scale to where they can be competitive. So, you know, we just think it's very undervalued. Today I think about a $5 billion market cap, maybe about $1 billion, $1 1/2 billion with
, now Yahoo! and
stock. And then the balance is about a half a dozen wholly owned companies, maybe another 25 companies where they have partial positions in.
And your fund is long?
We are long.
What is the risk? Sounds like a great story. What's the risk?
Well, I think people perceive the risk as because they really are a venture capital firm in a lot of ways. It's liquidity risk. And obviously, if there's not a robust IPO market or if these other companies aren't growing -- for instance, last year Amazon bought
, which was a CMGI investment, and
, which was a CMGI investment. These weren't necessarily liquidity events as the result of an IPO, but, rather, of an acquisition. But, you know,
, which is an IPO coming up, CMGI has, I think, maybe a 5% to 10% position in that. That should be a pretty anticipated deal that's coming in the next few months.
So, I think people look at the liquidity risk as being one. And then, it really is a proxy for the Internet's growth. So it's a favorite for short-sellers also.
And it sells at a premium to the net asset value of the public companies in it?
Oh, big premiums.
Yes. Well, I mean,
right now is selling at a discount, between about a 40% or 50% discount to the net asset value of just its public holdings. And traditionally, there was a
discount to the net asset value of the
shares that they held -- and I would just add perhaps that is one of the other risks of the story, is that traditionally holding companies have sold at a discount.
Well, I think it's trading at a premium to where again, the Lycos and the GeoCities was trading at, but it's still at a vast discount to the value of the private companies. And again, mainly because generally for the sell-side analysts who cover CMGI, they tend to be, again, even more overly conservative rather than stick their neck out in terms of trying to ascertain what's fair value as to those individual companies.
And then also, I think the track record has something to do with it, and the fact of the matter is that they've been very prudent and very helpful in guiding the companies along and have shown us phenomenal returns on investment over the last few years. So I think that has something to do with it as well. But I personally, in looking at each of the individual companies, I think it's a real big discount.
. Does it help the companies that they're part of this thing?
Oh, absolutely, yeah. What they can do is they can buy a company, maybe come in in the initial round. And you want CMGI as a partner 'cause they'll maybe bring in a GeoCities, a Lycos or some of the other companies as customers for you to build your scale that's necessary in order to be competitive. So they definitely play on that. And they really don't invest in a company unless they feel that they have a shot at becoming a leader in the market.
One newsworthy item that came up this week was they just funded $100,000 into a company called
and hired away a former, I think, president of
to head that company. And they're gonna take
on pretty hard within the next year. And I think they have a decent shot. And with $100 million in invested capital, given that broadcast.com, I think, started with -- I think they had less than $70 million in invested capital, they have a shot. And that's just one of 30 investments they have.
Do you think that the deal -- they have a big position in Lycos. Lycos agreed to cap out. What's your feeling on the Lycos deal? And does that say that there's an endgame that's before you bought or before CMGI might've bought?
Well, actually I'm glad you brought it up because I know you wanted to talk about it earlier. We were big Lycos holders, and unfortunately, after the deal, we sold our position. And I'm not so sure CMGI was thrilled, even from the get-go. You know, given the fact they only have, I think, between 20% and 25% ownership, there's not a whole lot they can do about it at this point. It used to be a majority-owned position, and I think at the end of the day they just went with what Lycos wanted to do.
I thought it was a terrible deal, and I think the strategy going forward -- this vertical integration -- really doesn't make a lot of sense. I don't think you'll see an
or a Yahoo! starting to buy up fulfillment capabilities. It's just not their expertise. I think they're gonna stick with just providing the consumers with the best merchants possible and just making a piece off the transactions. But to actually get into that low-margin, slow-growth business doesn't really make a lot of sense.
All right. Thanks, Ryan. We're gonna bop over to Andy Kessler here, who's from
, who's picked
"I think that the real place that investors should be looking is in this infrastructure market. Everything that is in place to support the Internet today has to be ripped out right now and replaced over the next 18 months. And then in 18 months, it has to be ripped out and replaced again." -- Andy Kessler
Let me just start with an observation that all of the companies that were mentioned today, whether it's Yahoo! or Amazon or Beyond I'm going to talk about, have a huge requirement for better infrastructure in their back office, and that includes the ISPs and the telcos that provide Internet access. And I think that this was billed as the Internet stock, an attempt to be thought of as the service company of the Yahoo!, Amazons. And so my pick is Beyond, which is a great company I love, and I'll go into it in a second.
But I think that the real place that investors should be looking is in this infrastructure market. Everything that is in place to support the Internet today has to be ripped out right now and replaced over the next 18 months. And then in 18 months, it has to be ripped out and replaced again. That -- you know, companies that have set up Web sites to handle hundreds of thousands and millions of users, you've gotta throw it out and set up something that can handle tens of millions of users.
And so there's companies like
is a company that does security.
does silicon for
with optics. I mean, there's a whole bunch of less sexy names on the infrastructure side, but I think that's the place to be going forward.
Having said that, there's a great Internet service company called Beyond, which is, in simplified terms -- Hollywood always likes to simplify things, saying, 'Oh, well, this movie is
on a train,' or something like that. So this is -- Beyond is the
of software, and that's actually truer than it sounds. The history is a company that was founded by Bill McKiernan, who was the president of
, who sort of almost inadvertently discovered this business model of, you give away or buy something when you can go build a corporate sales structure around it. And he spun out and he created a company called
, and inside was a company called
that went along and was a retailer of software.
But what made them different, unlike books or tapes or coffee machines, is that software can be delivered on the Net. In fact, it should be delivered on the Net. And what they found is a large percentage -- I don't have the numbers off the top of my head; I wish I'd brought it -- of the business that they do is actually downloads. And, of course, when you do download, there are no costs to goods. It's a much higher margin of business for them. It's a much higher business for the software company that is actually selling the software.
So they started along and they reinvented themselves last summer. They brought in the guy that was the VP of marketing, Mark Breier, from Amazon, who came in and said, 'OK, I mean, I know how to do this' and all those things, and started spending money to build an affiliate channel and to build a branch. And so far, the results have been quite good.
So from 30,000 feet to -- this is a company that can solve the last-mile problem. You know what I mean by the last mile? It's not the cable companies or your phone line. What I mean by the last mile is the
dude that shows up at your house or the
guy with the brown socks. I mean, that is the least profitable side of the business. FedEx hates coming to your house. They don't make money when they come to your house. And here with Beyond they can have the bulk pricing flexibility and the service capabilities to do downloading. And their growth has been quite spectacular. But, they've really only started spending large dollars on brand name and the like last August. And I think you're gonna see, too, in '99 a great growth spurt for Beyond.
And you're long?
Does anybody have any questions about beyond.com?
I'd be curious to get your reaction here. I think one of the big fears that investors have is that this seems like a very logical business for an Amazon to go into. And given the story that one of the biggest investments is gathering a customer base and then you can leverage that customer base over a wider and wider group of product offerings, it seems like software is the business they might want to go into. And given what happened to
, which were making a huge amount of noise about a very promising area, and as soon as Amazon flicked the switch, the stock tanked and actually the fundamentals tanked along with them, is that something that concerns you?
Competition has to be a fear of any company -- but, you know, there is a value to a first-mover status, and so perhaps they have that. They are purely focused on software, unlike a
or others that -- it's an adjunct to what they do. And I think selling software and the inherent customer service that has to be built around that is different from selling books.
If you're always selling packaged software, I don't think there's that much difference than picking a box of
off the shelf or picking Tom Wolfe's novel off the shelf. But when you're talking about downloading and you're talking about a technology wrapper and infrastructure that has to be built, I don't think it's gonna be that easy for Amazon. Now I think they can try. There's also been talk that a great way of getting their VP of marketing back -- right? -- is to buy them. But we don't own anything for buyout capabilities or buyout potential. We own it for the global prospect.
Andy, what about the free-money companies, like
, for example? I mean, they all seem to want to sell things in the computer business. You know, buy.com, for example, is sort of a bold calculation into that.
Yeah. Right. I think buy.com is going to muck up a lot of businesses, whether...
Buy buy.com. Yeah.
Yeah. But for now -- and we'll see where they go -- all these companies, as far as I can tell, are predominantly in the boxes off the shelf. And so here's a company that has a lead, is spending the money branding themselves as the leader and, I think, can fend off, you know, when a number-two player shows up, that may cause some market share issues, but when the number three through 10 players show up, it's usually too late.
One thing that's still a problem in downloading -- I don't know, how long does it take for someone to download, you know, at home some piece of software?
Well, if you try to download
, it's gonna take you -- on a 28.8 modem, it'll take you between now and... But if you're downloading
, it's not much more than five or 10 minutes. Now having said that -- I think they also found, number one, they have a very big corporate business so they have a deal with the
Department of Defense
, they got a deal with
and someone else, too, to be the corporate site. And what they also found is that while they may have consumer customers, that a lot of the downloads take place at work, where there's, you know, T-1 lines or OC-3 lines and, you know, in the blink of the eye, you can get Office 2000 for your desktop. So it's an issue, but the good news is broadband is not a problem in companies, it's a problem at home.
Do they need to start providing more than just being an intermediate, being a distributor as -- I mean, if you look at traditionally why intermediaries get paid, it's because they're taking on the risk of inventory. And when you have up- or downloads, there is no inventory and we're talking about friction with capital here, friction with transactions. There has to be a reason why a software developer uses an intermediary vs. just downloading it from their own site.
You know, it's a good point, but there is still channel conflict. So if you're
, you've gotta be careful of having a button on your Web site where you can buy something. Now some of these guys do, and they do it at, you know, suggested retail price. I don't know anyone that's actually spent suggested retail price for a piece of software. So, to them, Beyond looks like a retailer in the channel. In fact, there are a lot of companies that actually did set up commerce on their own Web sites and just weren't terribly successful -- customer service issues and a lot of things -- and they put a lot of that business to Beyond. So Beyond has actually closed a bunch of deals to be the pointer from the corporate Web site. When you say, 'I want to buy this,' it will send you...
Boy, I'm just surprised to hear you, Mr. Skeptic, too, basically talking about a company that is so vulnerable. You know, software retailing itself is vulnerable, but even downloading whatever they have -- how proprietary is the software, their procedure?
Their download was just changed. They went from, you know, what was a 10- or a 20-click to a two-click or three-click transaction to download. Look, every business on the planet is vulnerable in some form or another. What investors are paying up for in the Internet space is not only the growth, but the brand, if you will, that goes with it. But unlike selling hard goods, where your margins are stuck and perhaps dropping when someone undercuts you, here is a business that actually makes sense to do on the Web, because you can deliver the product on the Web. And not only is that good for beyond.com, it's good for the customers as well. That and, actually, online trading, is one of the few win-win businesses that you can find.
All right, let's go on to
on beyond.com. Nick,
Check Point Software Technology
Is an infrastructure company...
...trading at a very reasonable P/E. People know the bear case. So the bear case has always been, 'Well,
gonna get them because Sun says they used to do about 20% of the business with Sun as a reseller.' Well, Sun isn't in the reselling-other-people's-software business anymore, they sell their own. They have the Check Point firewall -- they make firewall software, by the way, which is more than you think it is, particularly since their firewall manages firewalls, and it manages the security process. At first, the bear case was the Sun distribution deal. Well, they still have those same customers, they just don't buy it through Sun anymore. The next was Cisco's gonna kill them. When was the last time you heard Cisco talk about security? They lost, they bagged, game over -- gone. Most of their peers are struggling.