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NETSCAPE NOW: A CLEARLY CONTRARIAN BUY

In its fewer than three years as a public company, Netscape Communications Corp. (NSCP) has made a quick round trip from Wall Street darling to Internet outcast. After rocketing to a high of 85 1/2 in December, 1995, after a stunningly successful initial public offering the previous August, the stock has spent much of the past two years on a steady and not always slow decline.

The stock's continued slide so far this year has been particularly striking -- not just because Netscape has fallen so far but because the shares of so many other Internet stocks have risen so dramatically at the same time. America Online (AOL) is up 61% in the past three months, Amazon.com (AMZN) is up 50%, and Yahoo! (YHOO) is up 41%. By contrast, Netscape has fallen about 25% in the past three months. On Apr. 2, a day when many Internet stocks hit new highs, Netscape fell 5/8, to close at 17 1/2.

Although Marc Andreessen may be playing an increasingly important part in the Internet software developer's future (Cover Story, Apr. 13, 1998), it's clear that Wall Street isn't 100% behind him yet. Analysts' consensus rating on the stock is "well-below average," says Chuck Hill, director of research at First Call Corp., a Boston firm that tracks corporate earnings. Of 14 analysts who follow Netscape, only three rate it a buy, two rate it a sell, and nine have it at hold, which is often a code word for sell. Andreessen himself unloaded 25% of his shares in February, although he says he was just diversifying his assets.

"Most of the damage [in terms of analyst sentiment] was done in January," says Hill. Netscape first warned on Jan. 5 that fourth-quarter 1997 sales were much lower than anticipated, partly because of the disastrous effects of price competition on software sales to businesses. On Jan. 27, the company reported a net loss for the fourth quarter of $88.3 million, or 92 cents per share, including nonrecurring charges. Revenues for the quarter were $125.3 million, down from $150 million in the third quarter -- the first quarter-to-quarter sales decline in company history. For all of 1997, Netscape reported a net loss of $115.5 million on revenues of $534 million. In 1996, Netscape posted record profits of $20.9 million, or 24 cents a share, on $346 million in revenues.

Analysts approve of the company's new direction as it emphasizes its new Netcenter Web site and software sales to corporations, rather than depending on selling Web browsers retail. "He is doing the necessary things to at least give Netscape a chance," Standard & Poors Equity Group analyst Brian Goodstadt says of Andreessen, Netscape's executive vice-president for product development. "If Netscape just stuck to the browser business, Microsoft would have soon taken over."

Indeed, "management is making headway on clarifying its product strategy," wrote analyst Mary A. McCaffrey of BT Alex. Brown, in a Mar. 18 report, though she added: "We believe a bit more time is needed to get it back on track."

Goodstadt says the E-commerce business is "still in its infancy" and that it's hard to tell how profitable it will become. There, too, Netscape faces stiff competition from other Internet players, though it has the advantage of already owning one of the most well-trafficked sites on the Internet.

For 1998, analysts' estimates range from a loss of 15 cents a share to profits of 9 cents. For 1999, the estimates range from profits of 21 cents to 73 cents, which is a "wider spread than usual," says Hill. McCaffrey is expecting a loss of 3 cents per share for 1998 and profits of 30 cents per share in 1999. "Longer term, we think the company will be able to clarify and execute on its strategy," she wrote recently, referring to its efforts to sell software for running large corporate networks and to make market inroads with new software for electronic commerce.

So there may be a positive long-term story to tell. If you want to bet that Andreessen has what it takes to engineer a turnaround, this could be a very inexpensive time to buy. There is also the chance that Netscape will sell out to a larger company such as Sun Microsystems or IBM, which Andreessen does not rule out as a possibility. You might want to take a chance on Netscape. But keep in mind that, for the moment, you would be taking a very contrarian view.

By Amey Stone
Associate Editor, Business Week Online



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