Thursday, March 25, 1999

(Nasdaq: CMGI)
Phone: 508-657-7000
Website: www.cmgi.com
Price (3/24/99): $176 3/8


Having shed its coattails, CMGI is sprinting just fine on its own. Just two years ago the company was known primarily for its then majority stake in Internet search engine specialist Lycos (Nasdaq: LCOS). CMGI was the thinking Fools alternative, trading for less than its entire stake in Lycos. I closed out a 1997 Daily Double on CMG Information Services (the company has since changed its name to CMGI) wondering if there was "any reason to doubt the savvy investors are still at work at CMG -- much less discount that prowess?"

CMGI answered loud and clear. While it was hoarding other Internet players in hopes of landing yet another Lycos, it turned out that CMGI was the star itself. The company had a $200 million market cap at the time of my first write-up. Today, just 19 months later, the company boasts a $9 billion capitalization.

After taking Lycos public in 1996 the company came back strong last year, wheeling out online community Geocities (Nasdaq: GCTY) into yet another Internet stock feeding frenzy.

While CMGI has been in the news recently, given the initial displeasure over the terms of the planned Lycos merger with USA Networks (Nasdaq: USAI) it is ironic. The company has sold off or spun off about half of its initial stake in Lycos over the years at prices far lower than USA is offering. Then again, it is that reinvesting of proceeds into new ventures that has made CMGI so alluring to Wall Street.

With its induction into the Nasdaq 100 stock composite index two weeks ago, CMGI has cemented its reputation as the incubator to tomorrow's Internet stars.


The CMG in the company's moniker stands for College Marketing Group. The company started out, more than a dozen years ago, selling a college mailing list database. It then expanded its mailing list offerings and added information processing services, including mutual fund prospectus fulfillment services.

Fittingly enough, CMGI's fate turned a lucrative corner after a blockbuster investment. In February of 1994, the company developed a Web browser under a newly formed BookLink subsidiary. With minimal investment in the product, CMGI sold it to America Online (NYSE: AOL) later that year, netting the company pre-tax profits in excess of $70 million when it ultimately cashed out.

The Massachusetts-based company has parlayed the proceeds into building its @Ventures subsidiary. Through this subsidiary, CMGI has acquired a majority stake in eight different Internet-related start-up companies and has an ownership interest in more than twenty others. Like Thermo Electron (NYSE: TMO) and Safeguard Scientific (NYSE: SFE), CMGI has become yet another publicly traded company that takes young companies under its wing, nurses them, and then materializes the gains. That would be 20/20 on a stunning 40-bagger over the past two years.


Income Statement*
12-month sales: $127.5 million
12-month income: $72.4 million
12-month EPS: $1.41
Profit Margin: 56.8%
Market Cap: $9,048.0 million
(*Includes non-recurring items. Data from Bloomberg.)

Balance Sheet
Cash: $106.3 million
Current Assets: $1101.9 million
Current Liabilities: $449.6 million
Long-term Debt: $1.0 million

Price-to-earnings: 125.1
Price-to-sales: 71


Through the years CMGI has landed a bevy of buyers and believers. Microsoft (Nasdaq: MSFT) and Intel (Nasdaq: INTC) have taken positions in the company. Beyond its BookLink sale to America Online, the company has also sold some of its upstarts to Microsoft and Amazon.com (Nasdaq: AMZN).

The argument can be made that CMGI has set its sights lower than the top dog in each field. BookLink was no Netscape (Nasdaq: NSCP). It bought into Lycos, not Yahoo! (Nasdaq: YHOO). However, CMG has successfully sought out online bargains that show the ability to appreciate in value over time. By doing that over and over again, taking the proceeds from one and plowing it back into a few more, CMGI's share price has gone on to outperform the very leaders it has skirted.

Buy low. Sell high. No company has taken to the old axiom the same way that CMGI has. For bargain hunters with a keen eye for the ultimate bargain hunter of the online world, it was an easy Double to find -- and then some.


Don't let the raw profits fool you. The stunning profit margins are the product of the huge windfalls that CMGI receives when it cashes out of its established investments. On an operational basis, the company is routinely in the red. Analysts expect the company to report a loss for each and every quarter through at least the end of fiscal 2000.

When your time is spent nurturing 30 different online upstarts, that comes with the territory. The real question is where will CMGI turn to now? Why would a company turn to CMGI for venture capital financing when there are underwriters foaming at the mouth over the prospects of taking even the most unproven company public as long as it has the dot-com suffix?

While that might mean that the bargains for CMG will be found much earlier in the development cycle, that should work out just fine for the company. It is a proven incubator. The inclusion in the Nasdaq 100 will give the company added visibility. But, like its past capital appreciation, the overnight 40-bagger days are over. Going from $200 million to $9 billion was one thing. Going from $9 billion to $360 billion would put it in the same camp as General Electric (NYSE: GE), with only Microsoft (Nasdaq: MSFT) left to beat out.

That won't happen. Yet the future will probably continue to be bright for CMGI, assuming investor enthusiasm for Internet companies continues to be strong. If the sky falls, then CMGI will tumble like the rest of them. However, that will place CMGI back in a position where it has excelled in the past. It can buy low again. It will eventually sell higher.

--Rick Aristotle Munarriz

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