LYCOS: THE NEXT INTERNET YAHOO?

The Internet came to Hollywood with the movie "You've got mail", just as it came to the White House earlier in the year when Matt Drudge broke the Bill-Monica scandal online. The new movie is a defining moment for AOL, the Internet investing equivalent of the Windows 95 launch for Microsoft three years ago and Bill Gates did not have Tom Hanks and Meg Ryan plugging his product!

Lycos (LCOS on NASDAQ) is an Internal portal company that controls some of the hottest digital real estate on the Web. It is the only search engine/directory in the world to control 4 of the top 20 Web sites on the Internet, second only to Yahoo in data traffic. Last year they were 30 points behind Yahoo in audience reach, now they are a mere 3 points behind, according to the latest Media Metric eyeball audit. Excite and Infoseek cannot match the exponential growth rate and audience reach of the Lycos network now visited by 45% of all online users. Yahoo is 3 points ahead but Yahoo is worth 26 billion on the stock market while LCOS is only $2.3 billion.

So why do I think Lycos is the Yahoo of 1999? Ten reasons. One, Lycos has a priceless network of multi-branded sister sites that drive data traffic to each other, much like CBS or ABC network programming. Hence its phenomenal growth rate in '98 over Excite or Yahoo (much bigger giants) and an irresistible model for online advertisers as they can electronically segment their product pitch to different sites and user demographics. Lycos owns some phenomenal Internet brands - the Hot Bot search engine, the Tripod.com and Angelfire community sites, the Lycos Shopping Network (the world's biggest virtual department store). It has made its portal the ultimate destination for its network sites, not the start line, a concept Yahoo and Infoseek are struggling to execute.

Two, Lycos has unique proprietary patented technology. Their search engines, Internet directory, home pages, chat rooms, E-commerce software, electronic mail and some of the most sophisticated technological infrastructure on the Web. It is no coincidence that Bill Gate picked Lycos as one of the search engines for the Microsoft Network.

Three, Lycos boasts extraordinary margins as high as 78-80%. Compare that with Amazon. Com's meagre 5 - 7%. But Amazon commands a 16.9 billion market cap even though it is mathematically impossible for them to ever be profitable. Jeff Bezos is running history's first digital Ponzi scheme but when will Wall Street realize that the emperor wears no clothes?

Four, profits will be the hottest commodity in Internet investing in '99. Lycos would be profitable had it not closed five M&A deals in 1998. Profitability is possible in 4Q 99 and then we will separate the men from the boys in Internet investing. Compared to YHOO and AMZN, Lycos is the cheapest Internet stock around.

Five, Lycos used the crash of summer '98 to pick up some incredibly cheap Internet content properties. For instance they bought Wired Digital and Who Where E-mail at 5 times revenues in all stock deals. Lycos is not a mere Internet portal/search engine directory. It is history's first digital branded network, with 28 million online users and 6 million page views a day. This is a priceless digital asset that should command a 20 billion stock market valuation on Wall Street. Will it ever? I think so.

Six, Lycos is a pure play on European Internet investing. They run joint net works with Bertelsmann, the German media conglomerate that is the global no.3 after Time Warner and Disney. They have offices in London, Amsterdam, Paris, Rome and the Fatherland. Digital media is just taking off in Europe and Lycos/Double Click are best positioned to mint gold in their sectors.

Seven, Lycos owns the world's largest Internet community (16 million registered) users. The Network picks up 20-30,000 new clients each day, double the AOL subscriber pick up rate. Please note that AOL is now worth $70 billion in the stock market. Ownership of communities is a critical competitive edge in New Age digital media because it cements consumer loyalty to a portal and its site networks.

Eight, Lycos is an intelligent play on E-commerce, merchant advertising. All the top names in technology (IBM, Compaq), retail (Gap, Mattel i.e Barbie dolls), consumer finance (American Express, Citibank), publishing (Wall Street Journal, Dow Jones) are on the Lycos Network.. It owns the NFL Superbowl Web site, the biggest sports event in America, a multi-million dollar gold mine for Lycos and an invaluable national brand building strategy. Why did Lycos get the deal? Because Disney owns 43% of Infoseek and the ABC/ESPN network who compete with Fox, the NFL's broadcast network. Licensing E-commerce and strategic partnerships are a third of Lycos revenue, exponential growth plays. Note that Fleet Bank of Boston paid $60 million to Lycos for its branded digital credit card.

Nine, Lycos is already one of the most valuable media brands in the world. Online media is growing at 100% per year for the next 5 years. As Internet usage/penetration grows, the value of this media brand will rise exponentially. It is no coincidence that Disney bought 43% of Infoseek, that NBC (GE's media network) bought C/Net, both inferior, smaller Internet search engine and directory brands. Also, ISP's and telecoms have to move into the portal space as AOL did with Netcenter. Lycos is thus a logical takeover play for ATT, for Time Warner, for Murdoch's News Corp, for Bertelsmann. Hostile deals are unthinkable on the Net because the stakes are way too high. Besides, Lycos has a poison pill in place - but if the price is high enough, any media franchise is for sale.

Ten, Lycos revenue growth is exponential. We were at 50 million top line in '98 and Wall Street consensus sees 120 million in '99, 200 million in 2000. Margins are far higher than Microsoft. The company's cash burn rate since its IPO is only 15%. Sometime in mid-1999, Lycos will overtake Yahoo is the world's Number one Internet engine and it will make money.

Every valuation model - audience reach per user, revenue multiple, strategic E-commerce partnership, discount cash flow analysis, relative valuation - convinces are that LCOS is a compelling buy at 50 - 52 for at least a 100% return in 1999. In Latin, the "Lycosidae" is a wolf spider that crawls across a web. To me, Lycos is the next Yahoo of '99/2000, a 10X Internet stock. A prosperous New Year to my readers and my deepest thanks to all those who called me to appreciate my work.

MATEIN KHALID
PORTFOLIO MANAGER
GULF AL BARAKA INVESTMENT LLC

The opinions expressed by the writer are his own and not endorsed by Press Release Network.

[ Back to Newsletter ]