Here's an interview with Blodget, the analyst who gave AMZN the price target of $400. He likes TBFC.
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Posted 1/14/99
Henry Blodget
-- Analyst, CIBC Oppenheimer
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Interviews
Internet stock guru braces for '99
Oppenheimer's Henry Blodget talks about his surprising Amazon.com report, holds forth on AOL and Yahoo! and lets us in on what's coming.
By Eneida Guzman
Let's face it. A lot of people thought Henry Blodget had lost his mind in cyberspace last month when he raised his target price on Amazon.com (AMZN) from $150 a share to $400. But the market clearly thinks otherwise.
In fact, comments by the CIBC Oppenheimer Internet/New Media analyst catapulted the online retailer's stock more than 40 points in a day, and it has barely slowed to catch its breath since. Adjusted for a subsequent 3-for-1 stock split, Amazon.com has since traded as high as nearly $600 a share, and is still well north of that $400 target.
So what's ahead for Internet stocks in 1999? "Given the run-up that these stocks have had, we wouldn't be surprised to see them pull back 25% to 50%," Blodget said in an interview. The 32-year-old analyst added that while he remains optimistic on the group, he "wouldn't bet the farm on any of these stocks" given current valuations.
Were you as shocked as most investors were about the market's reaction to that Amazon.com report?
Yes. Very surprised. These stocks are so difficult to value and so driven by good or bad news. If bad news is the prevailing trend, then Internet stocks are highly unpredictable and volatile. I mean, to own a stock that was at $230 and as volatile as Amazon, you almost have to believe that there's that much upside, or there's no reason to own it. So essentially that's what we were saying. Obviously the market was in the mood to hear some good news, so up it went.
The Internet elite
Every analyst on the Street has extraordinarily high expectations for the online retailer. Tell us more about the reasons you raised your target on Amazon to 80% above the price at which it was then trading.
We believe that this is one of the three premier companies in the Internet space, along with America Online (AOL) and Yahoo! (YHOO). Therefore, we always recommend to investors who are looking to make investments in the Internet that they at least have a position in the leading companies. But we take into account that these stocks are very hard to value because nobody knows how big the opportunity could be. It's really a function of how well the company is doing, whether the story is changing and whether they're executing according to plan. If so, our belief is that Internet stocks will continue to trend upwards. The market opportunity is large enough to support a lot of that.
How big is this "big opportunity"?
It's hard to say. We could all be really wrong, but I really think the opportunity in online retailing is as big as the Wal-Mart Stores (WMT) super-store opportunity was 30 years ago. That doesn't mean that I think Amazon is going to become Wal-Mart. Obviously, they are two very different concepts. But if you look at retailing in general, it's about a $1 trillion business, give or take a few hundred billion. The Wal-Mart super stores have 10% to 20% of that, depending on how you want to look at it. Could online retailing ultimately have 10% of the total market? I think so. So it could be an enormous opportunity. And then, as you look forward for Amazon, you just have to make assumptions about what kind of market share you think they can get, how big the market really is, how profitable they can be. All of that is a very inexact science. So you can come to the conclusion the stock is worth anywhere between $1 and $500.
Now that Amazon.com has moved through your $400 target price, do you have a new target on the stock?
No new target.
How will competition from the Barnes & Nobles (BKS) and Buy.coms of the world affect Amazon's growth?
The observation that this could be a $10 billion company is a very optimistic growth scenario. Again, we're looking into the future, we're picking trajectories. But obviously the numbers will be very different from that. Can they get there? I think they can. Secondly, Amazon is one of the fastest growing companies in history. I've not been able to find a company that sequentially has grown faster, longer than Amazon. That doesn't mean they don't exist -- we just haven't been able to find one yet. And third, Amazon is destroying its competition, including Barnes & Noble. It's because Amazon has created this wonderful customer loyalty that they've been able to have the revenue growth that they have. So, can that continue? I think so. Is competition a threat? Absolutely. Amazon has executed perfectly. I think they have the talent and the vision to enable them to stay one step ahead of the competition, but if they slack off they can be caught.
What about profits? Ultimately that's what the market rewards.
Amazon, in our opinion, is not losing money. They're investing money, and they're investing for a very large revenue number several years out. They are gaining leverage. So that bodes well. It doesn't tell you how profitable they can ultimately be, but it does tell you that the bigger their revenue base gets, the smaller that losses get as a percentage of it.
International growth
America Online just became the first Internet stock to be represented in the S&P 500. You're very bullish on the company. What are the key developments pushing this stock to your "strong buy" category?
We think it's one of the leaders in the space. They have critical mass -- much more so than anybody else. They've been diversifying their businesses. They're no longer wholly depending on the America Online service. Obviously, with the planned Netscape (NSCP) merger, they've expanded into the global and into the workplace markets. They're in a leading position internationally, which we think will provide a lot of the growth for a lot of Internet companies over the next several years. Ultimately we think we're in the early innings of a nine-inning game, because right now the U.S. has about 28 million households online. We think ultimately that'll be as many as 70 million, and international is hardly touched. So in terms of their growth opportunity, we're still in the early stages.
International online markets represent an enormous growth slot for most of the companies you follow. What's your time frame for when these opportunities start to show promise?
I think Europe is probably three or four years behind the U.S. and Latin America and the others are perhaps two or three years farther behind.
What is your target for AOL?
We don't even have a target on AOL or several of the companies that we follow at this point. Prices are hard to pinpoint in this environment.
You've got a "strong buy" rating on Yahoo! The company continues to report great numbers, but the stock's price appears to some to be overly optimistic.
Their management is very good, and that's incredibly important. The management of all three companies that we've been talking about is phenomenal. So as long as they continue to execute, I think the game is theirs to win. Ultimately, you may see Yahoo! diversify their media brands the way AOL has. Obviously they will continue to develop new services and continue to develop their international properties. But at this point they have a good solid leadership position and it's just up to them to maintain focus -- because things are happening so quickly in this space that if you take your eye off the ball you will wake up and find that you're way behind.
Branchless banking
Online banking is another area that you keep your eye on. What are you recommending there?
We like TeleBanc Financial (TBFC). They are the leading branchless bank in terms of total assets and total deposits. They've been around for almost a decade, which is obviously unusual in this space. In the banking business, along with other retailing businesses, there are significant cost advantages to operating without bricks and mortar. TeleBanc's strategy is to pass those savings along to its customers.
Consumers are becoming more and more discriminating about the rates that they will pay and the services that they get for those rates. And a lot of consumers are obviously moving their banking and financial activities to the Web and to telephones. There's no real reason to go into a branch. So TeleBanc is very well positioned for that. They understand the business. They understand how to provide great service without having a face-to-face relationship. And we think ultimately, as a low-cost, value provider, that they have a head start at reaching what will ultimately be an enormous market.
Are there any Internet stocks that you don't cover or that you would put on your "watch list"?
There are a lot of companies out there to watch. GeoCities (GCTY), DoubleClick (DCLK), eBay (EBAY) and At Home (ATHM), all are very good positions. These are companies that are emerging as the leaders of each individual sector, and thus far on the Internet, anyway, the stocks of the leaders have outperformed the second- and third-tier players in every group.
Electronic commerce exceeded everyone's expectations in 1998, especially this past Christmas season. What are your projections for e-commerce transactions in 1999?
In 1998, we had an estimate of about $7 billion. Obviously we had some very strong reports of the holiday season. I think pinpointing the number is less important than noticing that while the adoption of electronic commerce is starting to gain speed, a lot of the people that have come online in the last year or two have yet to shop online. There is a lag between the growth of online consumers and the growth of advertising and the growth of electronic commerce. So it's all another way of saying that if this Christmas was big, next Christmas ought to be huge. You can come up with wildly different numbers about exactly how big it's going to be, but again, I think the numbers are less important than the fact that it is clearly emerging as a major new trend.
Hot new year for the Internet
What other trends do you anticipate in this space for 1999?
I think you'll see more consolidation. The economies of scale are great and the economics of the business, both in the advertising business and in the retailing business, really favor the market leaders. So companies that are having trouble gaining critical mass will either try to acquire their way into a leadership position or will sell themselves to an industry leader. I expect to see more vertically focused companies emerging in different businesses.
I would say we still think the leading stocks are good stocks to own, though there is no way we will have another year like last year. It's almost physically impossible.
The growth in this space is virtually impossible to predict, but what is your overall outlook this year for Internet stocks, e-commerce and online growth?
General Internet growth will stay strong throughout the year. I think that you will probably see more growth in electronic commerce because it's in a third phase -- the first phase was people going online, the second phase was advertising, and electronic commerce really is the third phase. We're earlier in the growth path there, so we'll probably have very strong growth of electronic retailing throughout the year.
I would say we still think the leading stocks are good stocks to own, though there is no way that we will have another year like we had last year. It's almost physically impossible. We're not looking for the same kinds of returns that we've seen over the last couple of years. Frankly, given the run-up that these stocks have had, we wouldn't be surprised to see them pull back 25% to 50%. I think it would create a lot of opportunity for investors who missed out the first time to get in, and I don't think it would be viewed as a negative. I think it would be viewed as almost inevitable.
So, the bubble might burst?
People constantly compare this to a bubble and say that it's ludicrous and so forth. I think there's no denying that these stocks are incredibly expensive -- they're more expensive than any stocks in history, and that is a very good observation to make. It's also good to observe that what goes up often comes down.
I think some of the counter factors are that we've not seen a trend of this scale in a long time, or maybe ever. The medium is growing faster than any other medium in history, and it has the potential to affect a lot more industries than any other medium in history. So yes, the stocks are incredibly expensive, but the fundamentals underlying them are real. So it's not as though they're suddenly going to turn around and go to zero. Obviously, the question is whether you can stomach buying in at current valuations. It's very difficult, and we wouldn't urge anybody to do it unless they firmly believe in the long-term fundamentals and are clearly taking a portfolio approach. We wouldn't bet the farm on any of these stocks. |
