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Intel Ups CNET Stake
by Randy Befumo (TMF Templr@aol.com)

ALEXANDRIA, VA (June 5, 1997) /FOOLWIRE/ -- Stock of Internet and technology media operation CNET, INC. (Nasdaq: CNWK) jumped today after INTEL CORP. (Nasdaq: INTC) revealed it was increasing its stake in the company. Intel is buying another 201,253 CNET shares at an average price of $26.34 per share, increasing its stake in the content concern by 1.5% to 6.0% of the outstanding shares. CNET stock responded to the news by skipping right up to Intel's purchase price for the new shares right on the open and then going beyond it, rising $4 to $28 1/8 by the early afternoon.

CNET has been pretty volatile since it came public on July 1, 1996 at $16 a share. The stock initially fell as low as $11 3/4 right after the offering as companies related to the personal computer business were hammered in July. Its time in the desert was rewarded in late January when the stock surged as high as $35 3/4 on the strength of a positive article in the Wall Street Journal by Walter Mossberg and the introduction of a number of revenue intensive Internet sites like gamecenter.com, shareware.com and buydirect.com. In recent weeks, shares have been down again as low as $15 3/4 after the company reported disappointing first quarter results that showed a loss of $0.97per share.

Understanding why Intel purchased more CNET is important to understanding whether or not investors should be interested in buying shares of the company. The CNET stake is part of Intel's overall plan to create the need for speed among those who use personal computers. Innovative content, streaming sound and video and other bandwidth intensive applications require faster and faster central processing units (CPUs), Intel's core business. By supporting start-ups specializing in these kinds of businesses with small investments of capital, Intel can push end-user demand for fast CPUs. For CNET's part, having a partner like Intel with deep pockets and a desire to push the boundaries of what computers can do can be construed as nothing other than a blessing.

If Intel's ultimate return on the investment will not come directly from CNET stock, but from the desire for faster chips that CNET's content will inspire, investors should consider whether purchasing CNET based solely on Intel's purchase is a reasonable decision. The way that CNET fits into Intel's master plan does not necessarily mean that Intel expects a direct return on its CNET investment in the form of a substantially higher CNET stock price over the next few years. Consequently, an investor should look at CNET's basic business on its own merits completely outside of the price that Intel paid.

CNET booked $6.3 million in revenues last quarter and burned $8.4 million in cash from operations and investing activities. The company does not look even close to being cash-flow positive from operations and only had $11.7 million in cash (as of March 31) until Intel gave it $5.3 million in cash today. With $17 million in cash, the company can probably limp through the rest of the year generating losses as its Internet business begins to heat up and the customer acquisition device known as CNET Central draws more readers to the site. The company's Internet business has been growing much faster than the TV business, booking $10.1 million in all of fiscal 1996 and $4.5 million in the first quarter of 1997. Only $24,000 of the revenues from the first quarter of 1997 were "barter" revenues for banner swaps, meaning that the vast majority of that money actually came to CNET in the form of cash from advertisers.

Even more exciting, CNET actually had gross margins of 18% on its Internet revenues in the first quarter compared to negative gross margins in the prior quarter. Now is this business really worth the company's current market capitalization of $382.4 million? Even assuming $30 million to $35 million of Internet revenues this year and more moderate revenues of $8 million for the TV programs, the company still is capitalized at more than 10 times sales without significant margins. Certainly, once the company gets to the break-even point, each additional dollar of revenue will mean more in the way of incremental profits. However, given the inherent risk the business offers, it would seem that investors will eventually have the company sell at a discount to its potential a year or two out of $60 to $80 million in sales, not a giant premium.

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