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Wall Street, California | Stock Exchange: James Peltz
and Michael Hiltzik

CNet Will Try Your Patience and Reebok Is Running in Place

July 20, 1999|JAMES PELTZ and MICHAEL HILTZIK

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

CNet (CNET)

Jim: CNet operates on the Internet, but somehow, Mike, it's gotten a reputation for not being your typical Internet company--or stock.

Mike: That's because CNet actually turned some profits, including second-quarter earnings it announced last week. But it's rapidly going back to being your ordinary Internet company, because it's likely to be in the red pretty soon.

Jim: Launched by its chief executive, one Halsey Minor, CNet is mainly an online provider of information about computers and other tech products, and it helps steer buyers of those items to sellers via several Web sites and cable-television programs.

Mike: Yes, it tries to be a little bit of everything.

Jim: It's based in San Francisco, and though it's growing quickly, it's still pretty small, with revenue expected around $90 million this year. Most of that comes from its sale of banner ads on the Net.

Mike: Which brings us to the same old question with Net stocks: Is advertising ever going to actually produce profits?

Jim: Well, they did briefly in this case.

Mike: And CNet was very proud of itself for that. Then it turned out that it got those profits by skimping on something that every other big Net site must spend on big-time to grow, and that's promotion and advertising. Now CNet realizes it can't work that way anymore.

Jim: Which is why a lot of our readers have heard of Amazon.com, but maybe not CNet.

Mike: That's right. And if you want to know where all of the purported profits of all these great online companies have gone, well, they've gone into the hands of their advertising and promotion departments.

Jim: CNet is now joining the party. It announced plans to spend $100 million over the next 18 months on marketing.

Mike: To build its brand in target markets. In other words, here we are back to the same old story of how so many Net companies are running faster and faster just to hang on by their fingernails.

Jim: A terribly mixed metaphor, but you're right. The idea, of course, is that the marketing expenditures should eventually translate into huge revenue gains, making CNet a bona fide long-term player, even if its profits do evaporate.

Mike: Jim, the problem these companies face--and once again Amazon.com is the poster child for this--is that they're chasing a moving target. The more they spend on promotion, the more the light at the end of the tunnel seems to recede. And you start to wonder if they're ever going to actually reach a critical mass in audience or advertising clout or what have you to make money.

Jim: Notably, though, CNet has been portrayed as being unique, because it's not an Internet search engine or portal or auction house. But let's be real: Its stock has now become a quintessential, volatile Net stock. After a long period of lackluster performance, the stock has more than tripled in just the past year.

Mike: Though it's off a good 20% from its mid-April peak, like most other Net stocks.

Jim: Even so, I'd avoid this stock. It's still overpriced, even as CNet is staring at sizable losses from its marketing campaign. There's also no guarantee, at least today, that the campaign will vault CNet into the major leagues of Internet players.

Mike: I was toying with recommending this stock, which I know my followers out there would consider an irredeemably heterodox move, given my record. But CNet is different in some ways from the common Net company. For one thing, it's part-owner, with NBC, of Snap.com, which is a search engine-cum-portal that's the centerpiece of NBC's online strategy. Hence, you could make the argument that CNet is also a takeover candidate.

Jim: Heterodox?

Mike: But I keep coming back to the same idea that, even if CNet was taken over--let's say by NBC--the shareholders would not capture the kind of premium that CNet's stock price seems to anticipate. Unless, of course, it's taken over by another online company using its inflated stock.

Jim: You're probably right. Look what happened when Walt Disney Co. recently announced plans to buy the part of Infoseek, the search engine, that it doesn't already own. Infoseek stock fell that day.

Mike: And if anyone out there can figure out what an Infoseek shareholder is actually going to get in that deal, please give us a call.

Jim: There's something else. CNet is about to lose its profitability just as, believe it or not, Wall Street is starting to care about whether these Net companies can make money. So I'm not wild about CNet's timing, either.

Reebok International (RBK)

Jim: This is the well-known sneaker company, of course, and one of Wall Street's perennial laggards. Check this: The stock now trades for $15 and change--less than its price of eight years ago.

Mike: In a way that's appropriate, because it's sales aren't going anywhere, either.

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