Spencer E. Ante and David Readerman Chat on Yahoo!

The team fields questions on whether Internet stocks are overvalued and which companies to watch in the areas of access, site hosting and B2B.
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Spencer E. Ante and David Readerman chatted on Yahoo! on Tuesday, Oct. 12, at 5 p.m. EDT. As with all chats, this transcript is unedited.

spencer_tsc:

Hi. I'm Spencer E. Ante. I 'm one of three Internet reporters at TheStreet.com.

spencer_tsc:

My specific area of expertise is Internet infrastructure but I also write about e-commerce and e-media, as well as other Net-related issues.

spencer_tsc:

I've invited David Readerman to chat with me today.

spencer_tsc:

David is director of Internet strategy for Thomas Weisel Partners, a merchant bank based in San Francisco. I invited him to man the chat with me today b/c I think he is one of best analysts out there today covering the Net.

fedoardo asks:

Is INIT a good performer for the next three months?

spencer_tsc:

I'm not too familiar with the specifics of INIT's business but the hosting business in general is incredibly strong. Most of the top Web hosting companies--Exodus, UUNET, IBM and Frontier GlobalCenter--are growing like nuts.

rongain asks:

How about netzero.com?

spencer_tsc:

I think it's too early to predict the success of the free Net access movement. However, some of these companies seem to be acquiring customers at a really fast clip. Of course, the main question to follow is the customer retention rate.

crafty_doug_48 asks:

Are internet stocks currently over-priced?

dreaderman_tsc_2000:

Yes, some are overpriced. We still believe long term value exists in others. We favor Internet infrastructure stocks now across semi's / telecom / services & security.

spencer_tsc:

I agree that with Dave that infrastructure is the safest bet. As long as the Net continues the infrastrcutre plays will benefit from that growth.

dreaderman_tsc_2000:

I don't know about hard-ware.

watash773 asks:

It seems that Euope is ahead of U.S. in wireless/internet convergence. Can you name any desirable players in this area besides Nokia? (preferably with ADR)

dreaderman_tsc_2000:

Nokia is our top wireless equipment name; Ericsson could be a turn-around

crafty_doug_48 asks:

Are there any good internet plays in Europe, Asia and/or South America?

spencer_tsc:

Go for it Dave.

dreaderman_tsc_2000:

StarMedia is an interesting early leader in this market. We are restricted on the stock at this time.

spencer_tsc:

You also want to pay attention to US companies that are attacking the international markets.

laura_the_street:

Does it look like they'll become the aol of Latin America?

spencer_tsc:

Yahoo!, for example, has been very aggressive on the international front.

dreaderman_tsc_2000:

Yes, our analyst Gordon Hodge is of the opinion that they could be "the AOL" of Latin America- which is a huge under-served media market.

crafty_doug_48 asks:

On what basis are net stocks valued?

spencer_tsc:

HYPE!!!!

dreaderman_tsc_2000:

Internet stocks are valued in many ways: some on "street buzz" - others on fundamentals. It ranges from fear (from being left out) to greed.

spencer_tsc:

What's the difference between valuing a Net stock at 50 times revenue versus 100 times revenue? That's the question that's troubling a lot of people who do this for a living.

dreaderman_tsc_2000:

We believe that mkt cap -to- revenues is sometimes a sloppy short-hand for sizing market valuations.

spencer_tsc:

It's a whole new world out there but eventually the markets will return to reality and base the valuations on earnings.

nitrac asks:

Will internet "backboners" like Arba, Brcd, JNPR and others continue to do real well or will a CISCO eventually come and gobble them up or wipe them out?

spencer_tsc:

Cisco is not technically a backbone company, though they do sell a lot of the equipment that network providers use to run their backbones.

dreaderman_tsc_2000:

Our telecom equip. analyst Elias Moosa is of the opinion that cisco has all the "telecom era" pieces, other vendors such as Juniper have strong component products but not the entire solution (yet).

cyikky asks:

Based on current trends and developments, who has the best outlook in the DSL arena?

dreaderman_tsc_2000:

On DSL build-out, our Telecom Equip. analyst Jim Linnehan favor Rhythms NetConnections. Qwest is another recommendation in the telecom build-out.

spencer_tsc:

The top telecommunication companies that are in the DSL vanguard include US West, Pacific Bell and SBC communications, which has struck a few big deals with AOL.

spencer_tsc:

You also have to be thinking about cable modems. It's basically a race b/w cable modems and DSL to wire fast access in the world. The competition is between industries as well as within industries.

dreaderman_tsc_2000:

Spencer You're right - AT&T is going to make some big purchase decisions here.

spencer_tsc:

One incredibly hot company that supplies ATT with equipment that upgrades their cable networks is Harmonic (HLIT).

boots123 asks:

What sector of the internet stocks should we be avoiding?

spencer_tsc:

David?

dreaderman_tsc_2000:

We look at 11 major sectors across 235 Internet stocks; the e*Finance sector has been the weakest, also e*Tailing despite expected strong Christmas buying.

spencer_tsc:

David makes a great point that there's a glut of Net stocks. One other point: I say stay away from any that are not clear leaders in their sector.

dannygirl_01 asks:

Your opinion on e-mail management systems?

spencer_tsc:

We need them

dreaderman_tsc_2000:

I believe this will be an increasingly important area; from what I've seen Kana Communications has an interesting product / service

scottrigg1 asks:

Are there any internet infrastructure stocks that could be acquisition targets?

spencer_tsc:

news flash: Wilt Chamberlain is dead, age 63

dreaderman_tsc_2000:

Moment of silence for Wilt. Everyone of them is a possible target except Cisco with $200 bill. market cap

spencer_tsc:

I agree with David. The Net Infrastructure business is based on economies of scale. So there is an intense pressure to consolidate. Excite@Home has been rumored as an acquisition target.

dreaderman_tsc_2000:

Spencer: I'm not sure about that - I think Hindery's departure from T means ATHM and T are getting closer - not farther apart

spencer_tsc:

NIce try. Michael Armstrong, ATT big cheese, still believes that the co. should be split up into an access part and a content part.

dreaderman_tsc_2000:

A possible AOL access to T & ATHM is the wildcard - what do you hear?

spencer_tsc:

So Hindery's departure is not that important in the grand scheme of things.

dreaderman_tsc_2000:

I think it is. It changes the chemistry with Jermolak / AT&T and AT&T / AOL (Case)

spencer_tsc:

The loss of Hindery will hurt ATT's cable business more than its Net-over-cable biz.

unkadoug asks:

Jim Seymour has written favorably about Aware, but the stock has been a horror for the last three months. What's going on there?

spencer_tsc:

Jim is great but he's not right all the time. I can't clean up his mess. Email him at jseymour@thestreet.com

usa50xx asks:

What about AltaVista?

dreaderman_tsc_2000:

What about it? do you like the service more than the idea of CMGI / AltaVista.

spencer_tsc:

Their reach numbers are stagnant, but the CMGI investment could be a positive if they revamp the site as a CMGI-fueled portal.

dreaderman_tsc_2000:

What about it? do you like the service more thank the idea of CMGI / Alta Vista?

laura_the_street:

What role does AT&T have in AOL's potential buyout of Excite?

spencer_tsc:

For the most part, they call the shots since they own 58% of the voting rights, but it's not that easy. Because AtHome's cable partners have veto power over any major transactions such as a sale or split-up. So ATT will have to convince Cox and Comcast to break up the marriage.

dreaderman_tsc_2000:

A big say - about 58% voting rights. I believe an AOL deal IF it were to happen would lead to spin-out of Excite.

spencer_tsc:

Whatever happens it sure is fun to watch!

bngoldstein asks:

What do you think about ATHM?

spencer_tsc:

I just wrote about this. I think investors feel the promise of the company is enormous but that the co. has been consistently under-executing on its goal.

dreaderman_tsc_2000:

I think it is a strategic play on broadband cable; watch subscriber rollouts. Target this year is 1 mill.

spencer_tsc:

Blah Blah Blah. They keep lowering their numbers.

dreaderman_tsc_2000:

The demand is there; don't be mislead by the push-outs

drew1000_2000 asks:

What do you think the best Internet business magazine to read is?

spencer_tsc:

It's supply-constrained.

dreaderman_tsc_2000:

We don't read paper anymore - only on transcon flights.

spencer_tsc:

Besides TheStreet.com, I think The Industry Standard and Business2.0 and Fortune have been decent. Too bad Wired lost tis way since being acquired by Conde Naste.

crafty_doug_48 asks:

Can you comment on the potential for JDSUniphase to encounter significant competition in the short run? in the long run?

dreaderman_tsc_2000:

Our analyst team just tells me to buy it whenever I can; great franchise for long-term stock appreciation

dannygirl_01 asks:

What about Yahoo?

spencer_tsc:

Yahoo! is sitting on top of the hill.

dreaderman_tsc_2000:

'Lights out' 3Q99 results; awesome business model. Buy it for the long term (and not just because they are today's hosts)

spencer_tsc:

The company is so solid. And they've proven they can compete in an open environment.

jmkrph asks:

Is anybody watching lucent

dreaderman_tsc_2000:

No - we don't cover it.

spencer_tsc:

It's more a networking play.

HowardFromPhilly asks:

What is your opinion of Verticalnet and Internet Capital Group?

dreaderman_tsc_2000:

I believe that both are very interesting b2b investments; vert is still largely advert but could move to actual transactions. Internet Capital Group is fascinating portfolio of investments but, I like their focus on b2b exchanges (and vert is there largest holding).

dreaderman_tsc_2000:

Both are interesting b2b; vert is still largely advert. Internet Capital Group owns Vert and is doing interesting work on b2b exchanges.

value_auto asks:

What do you think of the online broker stock?

dreaderman_tsc_2000:

Tough, tough space. MER, DLJ and others are coming hard.

spencer_tsc:

I agree. It's very competitive and the initial run-up is already over.

scottrigg1 asks:

What are your top internet infrstructure picks and why?

spencer_tsc:

Inktomi--great search company with super-smart UC Berkeley engineers.

dreaderman_tsc_2000:

VRSN (e*security); cisco(the 800 lb. guerilla); txn (DSP chip leader).

spencer_tsc:

RealNetworks--the leading developer of streaming media software and services. Exodus--leading hosting copany with first-move advantage.

dreaderman_tsc_2000:

I agree with Spencer on RNWK. We forecast 1st time operating profit this quarter. I agree with Spencer on EXDS - it appears to have caught the attention of the shorts recently.

spencer_tsc:

Good point. I've written about some customer service problems they've been having. But they can overcome that if they FOCUS.

nitrac asks:

If MSN lowered rate to 10/mo. would people leave AOL and go Redmond?

dreaderman_tsc_2000:

Yes, I believe those that only want to buy access would swap. For some - low, every prices without bundling content is a preferred access solution.

spencer_tsc:

I agree with David--I think most people are willing to pay for a good reliable service. My gut tells me cheap access is a niche.

oldschool_forever asks:

What do you like to do on your free time?

dreaderman_tsc_2000:

Sleep and try to get some exercise (mtn & road biking).

spencer_tsc:

In the winter, ski down steep hills really fast. laura_the_street: Thanks. for joining us this afternoon.

dreaderman_tsc_2000:

Thank you everyone. Check our web-site at tweisel.com.

spencer_tsc:

See ya next time! Cleveland we love you!