Wednesday, December 17, 1997

Lycos Inc.
(Nasdaq: LCOS)
Phone: 508-424-0400
Price (12/16/97): $34 7/32


This itsy bitsy Internet search engine spider has been climbing up the waterspout again. New alliances and lucrative advertising deals have made the company what few expected so quickly -- profitable.

Last month the company reported its first ever positive quarter. Granted, the largest search engine, Yahoo! (Nasdaq: YHOO), had been in the black all year. For Lycos, landing more sponsors was the key. In the last quarter alone, companies paying for ad banners on Lycos rose from 400 to 460. It has also established itself as a viable outlet for Fortune 500 firms to advertise on Lycos. And investors have apparently found the stock to be a suitable place to park their investment dollars.

From a highly anticipated initial public offering (IPO) last April at $16 that bolted skyward only to crash to around $5 a share, shareholders felt the pain last year. With new deals and new profits, Lycos believers are now feeling the gains.


According to RelevantKnowledge, an Internet research firm, Lycos was the eighth most popular site on the Internet last month. Cybersurfers hit the Lycos page primarily to seek out other sites. With less than half the unique visitors as Yahoo! but barely trailing Excite, the company is the third-largest online search engine resource.

The bulk of the company's revenues come from advertising for the banner space that appears on the search result pages. The company also has other features like chat, e-mail, and even virtual roadmaps. CMG Information (Nasdaq: CMGI) owns a majority stake in the company.


Income Statement
12-month sales: $28.0 million
12-month income: ($3.8 million)
12-month EPS: ($0.27)
Profit Margin: N/A
Market Cap: $503 million

Balance Sheet
Cash: $41 million
Current Assets: $63.9 million
Current Liabilities: $25.8 million
Long-term Debt: N/A

Price-to-earnings: N/A
Price-to-sales: 18


While Lycos was the first search engine to go public, Yahoo! was the first to justify the niche's existence. Through lucrative deals with everyone from Visa to (Nasdaq: AMZN), the largest search engine took off earlier this year.

When investors bid up Yahoo! into a billion dollar company, it was natural to look for coattails. At the time, Excite and Lycos, despite getting about 50% of the hits as Yahoo!, were only valued at 10-20% of the market leader's market cap.

Since Yahoo! was not the only game in town, the same big money deals that that company landed soon trickled down to the lesser engines. In some cases the sponsors became the hunters. When locked up exclusivity with Yahoo! and Excite, Barnes and Noble (NYSE: BKS) had no choice but to pay up for a presence on Lycos.

It was a natural chain of events, and anyone who noticed that Yahoo! was taking off while Lycos was still fueling could have boarded the smaller search engine at ground zero before it bolted down the runway.


Now that Lycos has gone from a start-up to a profitable company, even if the net was just a penny a share for the quarter, the expectations now turn to how much money the company can make. Earnings estimates now have the company earning $0.08 a share this fiscal year and $0.23 a share the year after.

No one is going to argue that the company is cheap on a P/E basis, but since Yahoo! has maintained a $2.5 billion price tag, one would think that Lycos can justify its present valuation -- with just $10 million less in annual sales and $2 billion less in market cap.

Interesting things are happening to Lycos courtesy of its majority owner CMG Information. Recently both Microsoft and Intel have taken stakes in CMG and have discussed alliances with all of CMG's properties. Lycos is already well entrenched in Microsoft's Internet Explorer 4.0, but now the Wintel giants have a financial stake, petty yet actual, in Lycos.

Lycos is also branching out overseas. The company teamed up with Bertelsmann to develop native language Lycos engines throughout Europe. In just a few months nine different countries across the Atlantic have launched Lycos web search areas.

All this may not sound so unique in light of Yahoo! which, like Lycos, also has made recent forays into publishing and international waters. Which is why Lycos shareholders should keep a keen eye on what got the ground moving here -- Yahoo! and its share price. While Lycos should continue to gain ground, even if Yahoo! remains flat, just make sure the coat doesn't get pulled from beneath the feet here. If Yahoo! tumbles, Lycos will probably slip as well.

-Rick Aristotle Munarriz

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