Wednesday whipping; Yahoo drops 13%

Biggest one-day drop since April

Net stocks fall to Dec ’98 lows; Yahoo slashed by 21%

NEW YORK (CBS.MW) – Internet stocks suffered their biggest one-day drop in six months Wednesday, falling to their lowest level since late ’98, as investors bailed out of the group following Lucent Technologies’ earnings warning and Yahoo’s cautious outlook for revenue growth amid rising expenses.

Watch an interview with a market strategist from Piper Jaffray

The Goldman Sachs 36-stock Internet Index sank 9 percent to 332.30, the lowest level since December of ’98, when the index traded at 330.

The decline was also the largest percentage drop in one day since April 14 when the index lost 10 percent.

The biggest decliner in that index was Yahoo.

Shares of Yahoo (YHOO) plunged 21 percent to $65.38, the lowest level since late August of last year. Volume was heavy as 46 million shares traded.

Lucent Technologies (LU) plunged 32 percent.

After the close Tuesday, Lucent Technologies became the latest high-tech bellwether to warn that it, too, wouldn’t make the quarterly grade. At the same time, Yahoo released third-quarter results that topped both revenue and profit expectations. That was the good news that managed to allay some fears about weak online ad sales.

But Yahoo also cautioned that sales and marketing costs could rise faster than revenue would in the foreseeable future.

“The market doesn’t generally take well to cost increases without revenue increases,” said Jordan Rohan, an analyst at Wit SoundView. If Yahoo is growing its revenue at 33 percent year-over-year, this suggests a $65 to $70 stock price in 12 months, he said.

And in an ominous prediction for the overall Net landscape, David Readerman, head of Internet strategies at Thomas Weisel Partners, asked: “If Yahoo delivers these results and is going down, then what does that mean for companies that miss?”

In this environment, far be it for investors to hold onto stocks and take that risk.

Period of pain

Merrill Lynch Internet Holdrs, a basket of Web issues that trades as a single security, gave up 11 percent and the Amex Internet Index dropped 4.4 percent. Merrill Lynch B2B Holdrs lost 3 percent.

Stocks taking it on the chin include Priceline.com (PCLN), down 20 percent to $5.44, and EBay (EBAY), down 9 percent to $53. Inktomi (INKT) fell 14 percent to $78.94. RealNetworks (RNWK) dropped 17 percent to $25. Exodus (EXDS) lost 6 percent to $37.50. US Internetworking (USIX) plunged $3.41.

This year’s batch of Internet newbies also came under immense pressure. The 147 Internet-related IPOs that went public this year are down 17 percent so far this year, according to CommScan.

AvantGo (AVG0) lost 14 percent to $10.75. The wireless Internet software infrastructure company went public recently at $12.

The Internet IPO that has suffered the sharpest decline is Varsity Group (VSTY). Shares were unchanged on the day, but they are down 94 percent since going public in February. Robertson Stephens brought the online retailer of college textbooks public. Snowball.com (SNOW), an Internet media company, is down 90 percent from going public at $11.

Earnings watch

DoubleClick (DCLK) fell 14 percent to $21.19. The ad-serving company is set to report its third-quarter results Thursday. Wit SoundView analyst Lisa Haas expects the company to generate ad media sales of $80.5 million, which is down 10 percent sequentially. Half of that decline, however, is due to the loss of Alta Vista as a client. Alta Vista is building an internal sales force.

Haas expects DoubleClick to generate $157 million in total revenue, which includes systems revenue, or the total value of advertising sold. That’s up 5.7 percent sequentially.

CNet (CNET) reports its third-quarter results Oct. 24. First Union Securities analyst Carolyn Trabuco said CNet will be reporting on a pro forma basis as the merger between CNet and ZDNet is slated to close between the end of October and early November. Trabuco expects CNet to beat her combined revenue estimate of $106.5 million, up 17 percent sequentially. Shares of CNet fell 10 percent to below $23.06.

America Online (AOL) is expected to boost its third-quarter advertising revenue by 6.9 percent to $651 million, according to Wit SoundView’s Rohan. AOL is expected to report its results on Oct. 18. Shares of AOL dropped 4 percent to $54.88.