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Internet stocks amaze
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November 11, 1998: 11:54 a.m. ET
Analyst Henry Blodget talks about investors' ongoing love affair with Net
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NEW YORK, (CNNfn) -- If you're looking for the biggest gainers this year, you may want to look to the Internet.
Two of the best performers are Internet related: Inktomi [INKT] is up more than 580 percent since it went public in June at $18 a share. Goldman Sachs now predicts that eBay [EBAY], which also went public at $18, will be trading at $150 within the next year. And broadcast.com (BCST) has risen 227 percent since its $18 a share IPO.
CNNfn spoke with CIBC Oppenheimer Internet Analyst Henry Blodget about the Internet sector's recent surge. Is this pure investor speculation or a smart play on the future of a changing economy? Blodget offers a few words of wisdom in his "Business Day" interview:
JOHN DEFTERIOS, CNNfn ANCHOR: It's a bit strange in the sense that it almost seems like pure speculation, to be honest with you. I know this is a bet on the future but the rallies that we're seeing right now really are not tied to anything more than hope for the future.
HENRY BLODGET, INTERNET COMMERCE ANALYST, CIBC OPPENHEIMER: Right. There's a lot of excitement. This should be a good quarter to own these stocks. Advertising is very strong in the fourth quarter; there's a lot of excitement about Christmas, but definitely these are highly volatile stocks. They tend to run way up and then come way back down.
DEFTERIOS: There's one thing that was evident yesterday. We mentioned K-Tel, eBay -- these are companies that really don't have that big broad market share just yet. They're riding very, very high right now. Do they crash like K-Tel did once before?
BLODGET: Well, eBay is a company that actually could be an enormous company if it works out.
DEFTERIOS: Could be, that's the difference.
BLODGET: Yes, it could be. It's very early on, but a lot of the big money that's been made in this sector has been made by investors who really take the chance long before the business models are proven. You can see that with Yahoo! [YHOO]. eBay has the potential, and obviously it's a long way away from being proven.
DEFTERIOS: One thing we haven't talked about for a while are the eyeballs growing. The people are actually looking at the screens on the Internet. The growth per quarter last year was some 30 percent. What are we seeing now?
BLODGET: I think it'll probably slow down a little bit sequentially, but we're still seeing very strong growth. But one of the important factors in that will increasingly be international, which is projected to be a larger piece of the whole pie by the Year 2000.
DEFTERIOS: When you say international, do you mean countries like France or Asia logging onto the Internet, boosting the market share because there are no boundaries in this medium?
BLODGET: Yes, right now they are logging on to both sites in the U.S., and sites in their own country. And at this point the total international market is probably half the size of the U.S. audience, but it's growing very quickly.
DEFTERIOS: I think another thing is not talked about, Henry, and something you have been talking about for the last year are these joint ventures that take place on the Internet. It's not just the eyeballs in terms of selling products, but it's the joint ventures in the advertising revenues that are skyrocketing on the Internet right now.
BLODGET: Right, and you see actually that's one of the strategies for international AOL [AOL], Yahoo!, some of the smaller portal companies have all made international joint ventures. They're very smart to do that because they're partnering with local players. That's one of the ways of building the revenue.
DEFTERIOS: What's the best model still? You liked Amazon.com [AMZN]the last time we had you on.
BLODGET: We think a lot of different models will work; the portal model, Yahoo!'s model is an excellent model, AOL's is excellent, Amazon has yet to be proven but we think that will work. eBay has a very interesting model.
DEFTERIOS: Now, I know a number of viewers perhaps own one of the stocks or if they haven't they are looking to get in which is another question altogether, but let's say you have a model portfolio of Internet stocks. What would you put in there? Because we talked about Inktomi, which is on the software side of this business for example.
BLODGET: Inktomi is really an infrastructure play, you could definitely own stocks like that. There are several of them. We're still recommending that investors hold the larger stocks, AOL, Yahoo!, Amazon.com. But again they're likely to be very volatile. But over the last several years and quarters they have trended upwards. So, if you can stand the volatility they're good stocks to own.
DEFTERIOS: It is best to go with the brand names because they're starting to get the dominant market share... that you need on the Internet.
BLODGET: You probably have a little less volatility in the larger companies, the steadier names. None of these stocks are safe, but they are probably safer plays with better risk/reward profiles although if you spot something early with a small company the upside is much greater for the smaller ones.
DEFTERIOS: In terms of the online service providers or the portals, the search engines as they were known before; you have AOL and Yahoo! the dominant players. Excite [XCIT] and Lycos [LCOS] have done some very interesting things over the last six months. Can they stand alone or do they need to join one of those other two?
BLODGET: I think the jury is still out on that. They have done interesting things, in fact they've done incredibly smart things, and their momentum continues. I think they'll both have very good fourth quarters. We've obviously seeing Disney come in and partner with Infoseek. You may see other large media companies partner with Lycos or Excite -- really, the jury is out. We don't think the market will support seven or eight major players long-term. It's very likely that you will have three or four; so there should be some consolidation.
DEFTERIOS: In the graphic coming into the interview with you this morning, we saw that Infoseek [SEEK] was actually down yesterday. It has this major partner, in fact, that stock has not really participated in this giant rally. Why not?
BLODGET: It's had a run, it was languishing in the 20s for a while so it has come up quite a bit. I think people are really just waiting to see what happens when they launch the new Go network with Disney, and that's still a month or so they way. The formal launch his next March so we've got a while to see whether it really will work, and we don't think the stock will really take off until it does work, if it works.
DEFTERIOS: OK, I don't see any panic in your eyes, Henry, at all. Let the rally ride, is that what you're saying here?
BLODGET: Well, they'll come back in, then you have a buying opportunity. 
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