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I have carried out some research on CMGI, and for the past month, and have been looking at all of the public assets that CMGI owns. This has inspired me to try and value CMGI. This is the first of a 3 part series on my own version of a stock research report (feedback always appreciated). My stock research report on CMGI is organized as follows:

Part I: The problem with valuing CMGI
Part II: A new approach at valuing CMGI
Part III: Qualitative and Intangible factors, & Summary


PS. Each part is going to be kind of long, so you have been forewarned!
The Problem with Valuing CMGI

There are at least 3 problems in trying to value CMGI. The first one would be that CMGI does not earn income like a regular company. Your typical company that trades on the Nasdaq sells a product, or a service, and tries to generate earnings and earnings growth based on those sales of products or services. CMGI does not follow this approach. CMGI is an Internet incubator. By that I mean CMGI either acquires, or internally develops and operates Internet companies, as well as manage venture capital funds focused on providing seed capital to young startup Internet companies. However, the costs associated with acquiring, or internally developing, operating and bringing these young Internet companies public are very high. Consequently, CMGI's operational income (revenues from its owner-operated companies - [acquisition, R&D, sales & marketing, etc] expenses) is historically negative.
Operational Income:
Jul/98 - Jul/99 : (126,659)
Jul/97 - Jul/98 : (70,259)
Fortunately, this is not how CMGI derives its profits. I believe that CMGI derives its profits in three ways (although there may be other ways):

1) Selling part or all of its ownership of a company after it has gone public. A good example of this was CMGI's sale of some of its shares in LCOS after it went public.

2) It also profits when an external party wishes to acquire the company that CMGI owns (fully or partially). CMGI's current ownership of YHOO shares today are a result of the profitable sale of CMGI's ownership in GCTY when GCTY was acquired by YHOO. Another good example of this was the 54% premium that KANA paid when it acquired SILK.
When JDSU acquire ETEK, they hired Goldman Sachs to carry out a merger analysis in order to come up with a fair value for ETEK. (You can find this in their S-4 registration statement filed in Feb/99 at It would only make sense that KANA hired some Institutional brokerage to carry out a merger analysis of a similar nature in order to come up with a fair market value of 0.83 shares of KANA (pre-split) for each share of SILK.

3) Receiving more shares of a public company in which CMGI already has partial ownership. The best example of this was when CMGI sold Flycast and AdForce to ENGA in exchange for more shares of ENGA. Since ENGA is a CMGI majority owned and operated company (just like ALTA and NAVI), it would seem like CMGI was selling shares to itself. But what needs to be emphasized is that ENGA is a distinct corporate entity, and is generating revenues and profits independent of how CMGI is generating revenues and profits. I have started thinking of ENGA as analogous to a tracking stock, much like LMG.A (which is majority owned by AT&T). Once I started viewing ENGA in that way, it became much easier to accept the fact that CMGI was not selling shares to itself, but owning a bigger chunk of a desirable corporate asset.

Although there are more subtle problems with this model for generating profits (which I'll go into more details later) the obvious problem with this model is that there is no steady stream of income.
The next problem in trying to value CMGI is that because of its irregular earnings, it is hard to place a forward estimate on the earnings growth for CMGI. If you go to and check the estimates tab for CMGI, you will see that all analysts have given CMGI -ve earnings estimates going forward. Wall Street analysts usually try to place a value on the earnings of a company, presumably by trying to analyze how fast the company is growing its earnings, and how likely it can meet earnings projections. With CMGI, the Wall Street analysts have such a difficult time in coming up with a value for CMGI, because they have been unable to accomplish either criteria.

The third problem in trying to value CMGI is that CMGI's fortunes are tied to the future of the Internet economy. CMGI's process for creating wealth has been completely built upon the Internet economy. Its investments, and business model are all centred around the sustained growth and evolution (or maybe even revolution) of Internet economy. So if the Internet economy stalls, crashes, or suffers in any way, you can be sure that CMGI will be equally affected.
In CMGI's case, it has used this emerging trend of the Internet economy to create an immense amount of paper wealth (which I will look at in Part II). The inherent problem with paper wealth is that it is not considered "real" wealth unless all assets are sold in exchange for currency. It is hard to make a case for paper wealth as being legitimate if paper wealth always has to be exchanged for currency. There will always be those who believe that paper wealth is not legitimate, and others who believe that paper wealth is legitimate. Probably the best thing to do is for me to just report the facts, and then for you to form your own opinion about it.

( As a side note, one emerging trend of the Internet economy is to use stock as currency. Shares in a company are no longer singular in the purpose of representing ownership in a company, but they also serve other more practical purposes. Shares of a company's stock are now used as an equivalent to currency to acquire companies, establish joint ventures with other companies, compensate employee salaries, and raise actual cash if and when needed. And the fact is that more and more companies are using their stock as currency. As long as the company is creating value for its shareholders, and as long as that value thus created is in demand, there will be no problems. But if we really are in an Internet bubble, then neither of the above assumptions will hold true, and the consequences will be a market crash. )

So in summary, these problems which make it difficult to value CMGI:
1) dependence on the Internet economy
2) lack of regular earnings and earnings growth
3) unconventional method of generating earnings
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