Net stocks not as hot

Last year's darlings of Wall Street--Internet stocks--now are viewed with less enthusiasm.

Merrill Lynch analyst Lauren Rich Fine today downgraded America Online (AOL) to a "near-term neutral" from "accumulate," keeping it as a "long-term buy."

Bear Stearns yesterday initiated coverage on Yahoo (YHOO) and Excite (XCIT) with "neutral" ratings, although it picked up Lycos (LCOS) as a "buy."

AOL lost almost 5 percent in early trading today, with its stock price at 60-5/8, down from 63-1/2 at yesterday's close. Yahoo's stock, which traded as high as 92-3/8 earlier this month, lost about 2-3/8 in early trading to 84-1/8.

These companies' stocks have been on tremendous runs in recent months, and analysts have said that the prices have been aggressive.

NationsBanc Montgomery Securities analyst Greg Vogal, who has Yahoo rated at "hold," said people are not investing based on Yahoo's expected performance this year or next but are looking ahead to 2002. These stocks have surged, partly because computer hardware companies are somewhat out of favor, he added. "We think Yahoo is an expensive stock," said Vogel. "We believe in the business, but it is expensive."

Vogel has a "buy" rating on AOL, but added, "I wouldn't say it is a cheap stock. On a valuation basis, there isn't a lot of short-term upside."

Michael Graham, an analyst at Raymond James & Associates, agreed that the short-term upside was limited on AOL because of the strong rise in price in recent months. But he is bullish for the long term.

"We are not likely to see the stock move over next two months as it has in the past two months," Graham said. "But this stock has a chance to double several times over the next five or ten years because it is focused on becoming a big media company online."

"AOL now has to grow advertising and commerce revenue streams, which they are doing a nice job of," he noted.

Graham cited AOL's three-year agreement with Software.net, announced today, as another step in the right direction. AOL will receive $21 million in guaranteed payments and also is expected to share in advertising revenues.

Other analysts remain bullish on Net stocks.

Keith Benjamin, managing director at Robertson Stephens & Company, said in his weekly report that he expects the group's March quarter financial results to be strong, including traffic and audience growth.

"We expect most companies we follow to show modestly higher revenues than our estimate: more from commerce contracts [and] small sequential increases in advertising revenues, given the traditional seasonality of advertising budgets," he wrote.

Benjamin's reasoning: The Internet is still in its infancy and there are still herds of individuals that have yet to get online. He projected the Web audience could double over the next 12 to 18 months to more than 100 million people, up from 50 million people.

The most valuable audiences to these companies are those that require minimal incremental marketing expenses and have the potential to generate the most revenues. Benjamin said AOL would rank high in this area because its users are spending more time online and AOL targets customers for direct marketing.