ANALYST WATCH: 'Nets on the mend- for the most part

3 min read

Internet stocks are finally back in favor on Wall Street thanks in part to the Fed's decision to raise interest rates one-quarter of a percent this week and adopt a "neutral" bias. Analysts fired off a flurry of reports and upgrades this week.

The irony here is these stocks are the most vulnerable to any bump in short-term interest rates because most of them are trading at mind-boggling valuations. However, this latest quarter-point increase was expected and, most likely, the last change for at least four months.

Surprisingly, Lycos Inc. (Nasdaq: LCOS) didn't get much of a jump this week after it reported first-quarter earnings in line with First Call estimates.

In the quarter, Lycos earned $600,000, or 1 cent a share, on sales of $45.1 million.

Compared to Yahoo! Inc. (Nasdaq: YHOO), Lycos is dirt cheap.

Derek Brown, an analyst at Volpe Brown Whelan, reiterated his "strong buy" recommendation on the stock following the solid earnings report.

"Revenue growth 24 percent continued to outpace page view growth 17 percent, highlighting the company's ability to effectively monetize its traffic," Brown said in a research note.

However, Brown was one of several analysts to cut Lycos' fiscal 2000 earnings estimates, slicing it from 16 cents a share to 10 cents a share while raising its revenue estimate from $231.7 million to $256 million.

Lycos officials are confident the company will be able to maintain strong sales, traffic and earnings growth even after making a number of acquisitions including the purchase of Quote.com.

"Our outlook for this fiscal year has increased quite substantially," said CEO Bob Davis. "We're as bullish as we have ever been about our operating model going forward. ... We think there's great upside, with the strategy we've employed, with regard to earnings."

CS First Boston analyst Lise Buyer cut her fiscal 2000 earnings estimate to 9 cents a share from 13 cents a share and raised the revenue estimate to $253 million from $236 million. She also raised its fiscal 2001 earnings estimate to 48 cents a share from 40 cents.

Bear Stearns analyst Scott Ehrens also cut his fiscal 2000 earnings estimate from 18 cents a share to 10 cents a share and lifted the fiscal 2000 revenue projection to $256.7 million from $236.3 million.

Meanwhile, Lycos shares have yet to see the run-up that the rest of the sector has enjoyed in the past two weeks.

Its shares were trading around $55 a share Friday.

Twenty-two of the 24 analysts tracking the stock maintain either a "buy" or "strong buy" recommendation.

NetSilicon makes its move

NetSilicon, which makes semiconductor devices and software used in the design of embedded systems, raced past analysts' estimates in its third quarter, earning $905,000, or 5 cents a share, on sales of $10.1 million.

That $10.1 million in sales represents a three-fold improvement compared to the year-ago quarter.

Ashok Kumar, an analyst at Piper Jaffray, reiterated his "strong buy" rating on the stock, noting the company's gross profit margins improved 500 basis points in the quarter to 55.1 percent.

"Going forward, although the company maintains a $7 million backlog, pending better visibility with respect to imaging sales we are not changing our estimates for FQ4 or FY01," Kumar said in a research note. "From a valuation perspective, the company continues to trade at a 60 percent discount to its peer group. Our $17 price target implies a more moderate 50 percent discount to the same, or 60x CY00 EPS estimates."

NetSilicon shares were trading around $15 a share Friday.

Internet Index on fire

BancBoston Robertson Stephen's NETDEX index continues to soar, jumping 11 percent this week to 697.62. That's pretty good, but it's even more impressive when you consider the high-flying Nasdaq composite only gained 5 percent while setting consecutive record highs.

The NETDEX is up approximately 90 percent from its August low, it is still down about 4 percent from its all-time high of 801.41 on April 13, showing there's still some legs left in this rally.

"We are happy about the upcoming holidays and feel that we have already celebrated with most stocks," BancBoston said in a research note. "We still see some room for the stocks to run, but feel less aggressive today on new purchases."