Web shares finish week lower

Net stocks fall in a ‘black hole’

By Bambi Francisco,
CBS.MarketWatch

Last Update: 5:24 PM ET Jun 16, 2000

SAN FRANCISCO (CBS.MW) – Net stocks ended mixed Friday, finishing the weak lower
as shares of EBay dropped after an analyst said the online auctioneer will not
significantly improve on its quarterly earnings when it reports next month.

“It does feel like we’re in a black hole,” said Greg Jones, director of
research at Briefing.com. “We’re not in earnings season; we’re past all the
key economic reports. Between now and the beginning of next month, there’s no
catalyst.”

The Goldman Internet Index fell 0.5 percent on the day and declined 7 percent for the
full week. The Nasdaq Composite gained 14.79 to 3,860.

Making the grade

EBay (EBAY) lost 2 15/16, or 5 percent, to 61 1/8. For the week, the stock fell 18
percent.

Merrill Lynch analyst Henry Blodget said he was “expecting another solid quarter,
but we are not looking for much upside surprise,” on revenue or earnings, he said.
“This may come to a surprise to some investors, as EBay has often beaten expectations
easily.”

Blodget estimates that quarterly revenue will grow 10 percent from its first quarter
numbers to $94 million.

EBay’s person-to-person payment system Billpoint is not generating
“material” revenue, Blodget noted. He expects a 7 percent decline in auctions
per user, but a 31 percent jump in customer acquisition cost. EBay is expected to have
spent $17 to acquire a customer in its second quarter, up from $13 in the first quarter.

Quarterly earnings should come in at 3 cents per share, unchanged from the first
quarter, he said. Gross margins should remain flat at 73 percent. EBay is expected to
report second-quarter results on Tuesday, July 25.

Hosting, applications, services

Content distribution firm Digital Island (ISLD) gave up 1/4 to 32 9/16. Shares
popped to 35 5/8 earlier after Chase H&Q analyst David Levy initiated coverage with a
“buy” rating and an initial price target of $60 to $65 a share. Levy pointed out
that Digital Island’s shares trade at 10 times its expected revenue for 2001, while
shares of its rivals trade at 44 times revenue.

It appears that the market is valuing Digital Island as a “plain-vanilla” Web
hosting company, he said.

But shares of Web hosting giant Exodus (EXDS), which also offers content
distribution through its stake in Mirror Image, a unit of Xcelera.com (XLA), saw its
shares soar 10 1/8, or 11 percent, to 10 3/14, their highest level since April 20.

Breakaway Solutions (BWAY), a hybrid application service provider and I-consultant,
saw its shares run up 3 1/8, or 9 percent, to 37 1/8.

Critical Path (CPTH) gained 2 3/8, or 5 percent, to 49 7/8. Earlier this week, the
e-mail outsourcer said it’s extending its partnership with Aether Systems (AETH).
Critical Path CEO Doug Hickey told CBS.MarketWatch.com that he expects the alliance
to generate meaningful revenue by the first quarter of 2001.

Expanding reach

In a bid to reach the rural markets in the Southeast, Covad Communications (COVD), a
provider of high-speed broadband access, is spending $202 million in stock to buy
Nashville, Tenn.-based BlueStar Communications, a provider of broadband and Internet
services for small and medium-sized businesses.

Shares of Covad fell 16 13/16, or 27 percent, to 18 7/16 on the news amid concern about
the impact the purchase will have on Covad’s financial performance.

America Online (AOL) lost 3/4 to 54 1/4. In another sign of its growing online
dominance, America Online said Friday its membership had increased to more than 23
million, up about 9 percent from the beginning of the year

TiVo (TIVO), AOL’s recently announced interactive TV partner, saw its shares
jumped 2 3/4, or 9 percent, to 32 1/4 to close out the week with a 24 percent gain.
Investors had, however, bid up the stock to as high as 37 1/2 earlier in the week
following news of the AOL partnership.

Bambi Francisco is Internet editor of CBS.MarketWatch.com.