For One, Lycos Doesn’t Excite; for the Other, It’s a Prime Portal

Stock Exchange lets readers listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

Lycos (LCOS)

Jim: All right, Michael, today we look at another big Internet stock. Lycos is the third-biggest Web portal company, that is, a site Net surfers use as home base or as a search engine to find other sites. I say third-largest in terms of revenue, behind Yahoo and Excite, but one research firm says Lycos actually surpassed them in terms of viewership in March, with some 32 million visitors.

Mike: And where would Lycos rank in terms of losses?

Jim: Uh-oh, I see where this is going. Yes, it ranks up there with those, too.

Mike: Incidentally, let me just interject that these “viewership” figures you mentioned are a little misleading.

Jim: How so?

Mike: Well, Lycos is counting not only visitors to Lycos.com, its search-engine site, but also to a handful of other popular sites that it owns, like Angelfire and Tripod.

Jim: Which are favorite sites for those people with their own home pages.

Mike: Right.

Jim: Of course, Lycos is also one of these unbelievable Internet stocks that’s skyrocketed above any rational valuation of the company. Its revenue last year was a paltry $56 million, and, while that number will be much higher this year, it still pales next to its stock-market value of $5 billion.

Mike: But here let me make a couple of general points about Lycos and its ilk. I don’t like Lycos.

As an Internet search engine and site, more power to it. It works just fine. The dog goes out and finds the things you want. But as a stock, I think Lycos is crummy.

Jim: It’s just the opposite for me. I don’t see its search engine or Web content being particularly more notable than the other major ones.

Mike: Then what’s there to like about it?

Jim: For starters, I don’t look at Lycos as merely a stand-alone company. It’s just gotten past one takeover offer, and I think it’s going to get another, which is going to be one lever to lift this stock higher.

Mike: Boy, are we in disagreement this time.

Jim: Back in February, media mogul Barry Diller and his USA Networks struck a deal to buy Lycos and basically merge it with his own online interests, including Home Shopping Network and Ticketmaster Online. Except that one of Lycos’ major stockholders, another Internet outfit called CMGI Inc., bitterly complained that Diller wasn’t offering much of a premium over Lycos’ trading price.

Mike: Not much of a premium? Diller offered a discount to the market.

Jim: OK. So the merger languished, and Lycos’ stock lost about 25% of its value. Recently the deal was mercifully called off and Lycos’ stock started rising again. Now it trades around $100 a share, but naturally it has no P/E, or price-to-earnings ratio, because it has no E, or earnings.

Mike: Right. It’s got one of those P/Es that’s either infinity or a mathematical impossibility--I don’t remember what happens when you divide something by zero, but it’s not good. At least not in the real world.

Jim: I think you made your point.

Mike: I’m not done. Before Diller came up with his offer, Bob Davis, the Lycos CEO, shopped this baby to every orphanage in town. He talked to NBC, which is owned by General Electric, and to CBS. He probably talked to Walt Disney. Finally he made the deal with Diller at some percentage under what his stock was selling for at the moment. So how many other offers would you guess were on the table?

Jim: Uh, let’s see . . . none?

Mike: Clearly none. Furthermore, in the months since the Diller deal was announced, how many other bidders stepped up and offered to take Lycos over at a higher price? None. So how many potential bidders are really out there for Lycos, now that NBC has made its deal with Cnet, Disney has made its deal with Infoseek and other media companies have made their links with Net firms? Who really needs Lycos?

Jim: Look, you’ve actually reinforced my argument. Everyone is pairing up to have a stake in the Net, Lycos is a major player, and sooner or later it’s going to get taken out. America Online bought Netscape. @Home is buying Excite. Yahoo is buying GeoCities. Need I go on?

Mike: What makes you think that a legitimate media company, one analogous to USA Networks, is going to want to pay any more than Diller offered if nobody bid against him? Particularly since in the four months that have passed, almost everybody else has filled up their dance card?

Jim: What, you think that once a company makes one acquisition in an industry, it’s done? Perhaps one of these media giants will take Lycos in addition to the ones it already has. What I am saying is that investors should apply at least some takeover premium to Lycos, that’s all, given all the Internet mergers we’ve seen recently.

Mike: Well, let’s analyze these deals. America Online bought Netscape. That’s an Internet company buying an Internet company. @Home is buying Excite. That’s an Internet company buying an Internet company. Who else?

Jim: Disney bought a chunk of Infoseek.

Mike: Yeah, but not at a price that even approaches the price that Excite got from @Home or Netscape got from America Online. Why? Because Disney and other media companies are real corporations with real earnings to protect and real stock prices, and they can’t afford to pay the inflated prices that other Internet companies can pay by using their inflated stocks as currency.

If a company steps up and actually has to pay greenbacks--of the sort that, say, Robert Rubin would recognize--it’s not going to pay billions of dollars for Lycos. That’s the lesson Diller taught.

Jim: So you’re saying that Internet investors like Lycos’ big holder CMGI and its chairman, David Wetherell, who balked at the Diller deal, are living in never-never land?

Mike: I’m saying they’re all drinking the same Kool-Aid.

Jim: Remember, I’m only saying Lycos’ takeover potential is just one reason to buy the stock. Want others? It’s an Internet stock with a big following, and I see nothing on the horizon to slow its operating gains.

Mike: We’ve already seen these stocks drop this spring, with some of them 30% off their highs. So if you step into an Internet stock today, are you doing so before it doubles--or before it drops by another third?

Jim: Who knows? Yes, this is a speculative, highly volatile stock. But it is a major force on the Net, it’s still growing and it probably will get bought. And, I might add, Lycos has a 3-for-1 split due in July, which won’t hurt.

Mike: And it’s still not managed to turn a dime of profit.

Jim: It doesn’t matter. Almost none of the Net companies do.

Mike: It doesn’t seem as if it matters today, but it will matter tomorrow. I say that to invest in these stocks at these levels is just not responsible. By the way, let me throw out one more statistic about Lycos that I think is stunning. Diller finally dropped his bid after learning one salient fact: that about 65% of Lycos’ stock was held by day traders--you know, those investors who typically don’t own stocks for more than a few days, if that.

Jim: So what?

Mike: Look, I know day traders as a group are fine individuals. . . . I’m sure they’re good family people, pillars of the community, and many even might belong to the PTA. But I maintain that they are cruising for a bruising and that following this crowd is not the way to make money.

Jim: Now you’ve lost me. Who cares whether the Lycos holders are day traders or Fidelity Investments or whoever?

Mike: You would like to think Fidelity and its peers are more educated investors than some of the people doing day trades. But when Diller failed to put a premium on the table for Lycos, the day traders were squealing like mad because Diller had offended their sense of propriety.

Jim: And you think the fund managers at Fidelity or Vanguard or any other institution would have just sat there quietly and let Diller railroad them? Whether you’re a day trader or running the Magellan Fund, you want a profit. Simple as that.

Mike: I’m simply noting that day traders are not investors who keep tabs on the fundamentals of a company and its industry.

Jim: Who can blame them? We’ve seen very little correlation between a Net stock’s fundamentals and its stock price.

Mike: Then why all this talk about how big Lycos is, and how many visitors it has, if all that is irrelevant to the stock’s pricing?

Jim: Lycos won’t rise or fall based on incremental changes in its operating performance, you’re right. But the Internet is now a crucial industry, and Lycos is a player. I believe the big media companies, or perhaps another Internet firm, will want to incorporate Lycos’ audience into its empire, that’s all. Now, whether its growing audience translates into growing revenue for Lycos is another matter.

Mike: Look, one thing Diller understood was that for any of these pure Internet companies to really capitalize on the so-called eyeballs they’ve aggregated at their sites, they have to turn their audience into a buying audience. He was able to offer the expertise of Home Shopping Network and Ticketmaster in taking electronic orders for merchandise and actually delivering the merchandise and responding to customer-service problems all along the line. But none of these other companies that talk about e-commerce, like Lycos, have shown yet that they really know how to do that consistently to generate a reasonable return.

Jim: There’s no question Lycos is a risky stock--big time. I mean, when we discussed America Online and Amazon.com, we felt our points about their lack of fundamental strength had lots of merit and were reasons to avoid the stocks.

Mike: Those points may yet be right.

Jim: And in the meantime you could have made a bushel of money with those stocks. I’m not guaranteeing it will happen again to all of them. But now takeovers are a big part of the scene around Net stocks, and we shouldn’t discount that. Whether Lycos gets a bid next week or next year, I don’t know. But it will get one.

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Write or e-mail with a stock you would like to see discussed in this column. Times staff writer James Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Times staff writer Michael Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the new book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

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Lycos

Monday: $97.75