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CMGi stumbles on earnings miss

Shares of Internet incubator CMGi Inc. (Nasdaq: CMGI) fell 10 1/4 to 91 1/4 after the company reported a wider-than-expected loss in its third quarter.

CMGi lost $27.7 million, or 29 cents a share, on sales of $43.7 million, much worse than the 13-cent-a-share loss forecast by First Call analysts. Including one-time items, CMGi reported a net loss of $27.8 million, or 30 cents per diluted share.

The numbers, however, don't mean a lot. It's not easy getting a read on CMGi, an Internet incubator that's a mix of a venture capital company, closed-end mutual fund and a startup. Due to CMGi's numerous holdings and investments, quarterly results tend to fluctuate.

"As we value the stock on an asset value basis, and the majority of this value comes from non-consolidated investments, we continue to believe revenue and earnings mean very little in evaluating CMGI," said Keith Benjamin, an analyst with BancBoston Robertson Stephens, in a report.

In fact, CMGi said it would launch two more venture capital funds to invest in Internet-related companies in the next ten months. "We believe both of the next two funds, the first of which we expect to be raised by the end of the year, could be 2 to 4 times the size of @Venture III, or as big as $1 billion each," said Benjamin.

However, if the IPO market fizzles, CMGi's Internet investing could lose its appeal. Benjamin's price target of $150 a share assumes all of CMGi's children launch a successful IPO.

The $43.7 million in sales was a 12 percent improvement versus the second quarter when it earned $13 million, or 14 cents a share, on sales of $38.9 million.

Of course, the bulk of that profit was derived from the sales of shares it held in a number of highly successful Internet companies including Lycos Inc. (Nasdaq: LCOS) and GeoCities Inc. (Nasdaq: GCTY).

Third-quarter sales of $43.7 million represent a 141 percent jump versus the year-ago quarter when it made $7.9 million, or 9 cents a share.

In the quarter, CMGi realized an $859,000 pre-tax gain from the issuance of stock by GeoCities and a one-time research and development charge of $4.5 million related to the acquisition of Internet Profiles Corp.

Despite the financial results, CMGi can call the quarter a success thanks to series of strategic partnerships and investments from major technology firms.

In May, Gateway Inc. (NYSE: GTW) said it would invest $200 million for an ownership stake in CMGi while both Dell Computer Corp. (Nasdaq: DELL) and Microsoft Corp. (Nasdaq: MSFT) have signed on to participate in various strategic and marketing partnerships.

Rather than focus on the performance in this particular quarter, CEO David Wetherell chose to highlight the progress of CMGi's lucrative investments.

"CMGI's majority owned Internet companies have made strong progress in executing their business plans, and these companies are rapidly increasing in critical mass," Wetherell said in a prepared release. "We believe the recent additions of Gateway and Dell as strategic partners, and the continued support of Microsoft will provide valuable business partners."

CMGi shares moved up well above $320 a share ahead of a 2-for-1 split in May after trading at just $17 a share in October.

Eight of the nine analysts following the stock rate it either a "buy" or "strong buy."