Started By: Mark Johnson
Date: Feb 19 1999 1:05PM ET
The Internet Financial Connection, February 4, 1999
Presented by Mark Johnson, Editor of the IFC
techstocks.com
It appears exclusively on Silicon Investor
techstocks.com
Undervalued by about 20-25 points.There's always the perennial takeover candidate
--------------------------------------------------------------
To Subscribe to this Newsletter: Send an email to
<mailto:ifc-request@mLists.net>
with "subscribe" in the message body.
Please tell a friend about this newsletter :)
--------------------------------------------------------------
This newsletter can be viewed at
techstocks.com
In This Issue:
1. The One Internet Stock to Buy Now!
2. OnSale
3. Covad Communications
4. Qwest Communications
5. Interesting Articles On The Internet by Joe Dancy
6. Highlights on SI: Confessions of a Tulip Head
by David Zgodzinski
7. Highlights on SI: by Tom Taulli
8. Investment Opportunities In An Unstable World
9. Disclaimer
----------------------------------------------------------
1.
techstocks.com
Everywhere you look there is a major merger
in the Internet industry. America Online
bought Netscape in a deal that was valued
at $4.2 billion. @Home is merging with Excite
in a deal worth $6.7 billion. Yahoo! announced
that they would merge with GeoCities in a deal
worth $4.6 and would cede. This merger would
give Yahoo! a 58% reach of the total
Web audience.
In the search for Internet users, larger
Internet based companies will continue to
search for and acquire companies that
compliment and increase the number of users
to an Internet company. Microsoft continues
to make very smart but small acquisitions of
smaller Internet companies with a niche. That
list includes HotMail and LinkExchange.
What is most important right now is that an
Internet company must accumulate as many users
as possible. The number of unique users is
essential to the growth of any Internet company.
Without users you cannot sell advertisements,
e-tail related products and so on.
One company that is sitting on a gold mine of
registered users and accumulates a large number
of new users on a daily basis is RealNetworks
(RNWK 72 1/2). Real is a leader in the streaming
media market. It develops and markets software
products designed to enable users of personal
computers and other consumer electronic devices
to send and receive audio, video and other
multimedia services using the Web (as taken from
their web site). Real has more than an 85% share
of the streaming media market.
What is truly amazing about Real is that they
have more than 50 million "unique" registered
users, up from 20 million one year ago. This is
not like the McDonald's sign where it says "Over
99 Billion Served," and only a few billion people
on the planet. These are "unique" users and they
are not counted twice. Their software is
downloaded at a rate that exceeds 170,000 times
per day.
On October 19, 1998, Netscape and Real announced
an agreement to distribute and include RealNetworks
RealPlayer software with Netscape's Internet client
software Netscape Communicator 4.5. Real also has
strategic relationships with Intel, Lotus and
Inktomi. Relationships with media companies include;
ABC, CNN, ESPN Broadcast.com and the Wall Street
Journal. Real is not shy about working with large
and well known companies.
What a large company (primarily an Internet related
company) may want from Real is its large quantity of
users. Perhaps before each software download (or
maybe after) a list of questions could come up prior
to the use of Real's software. These questions may
include; "Would you like to know more information
about our FREE Internet email address?," "Would you
like to bookmark our search engine?," "Would you
like to know more information about our online bill
paying plan?....". Those are just hypothetical
questions that could be asked to people that
download Real's software. They could compliment a
large web portal, or media company. A permanent link
to a free email address could be embedded on the
front of RealNetworks software. Everytime you use
it, you would see it. Their software is already
somewhat like a mini-web browser with search
capabilities and links to access other
complimentary sites.
The question is, how much would someone be willing
to pay for Real and who would it be? As noted above,
a rather large Internet company would most likely be
an ideal candidate. AOL (they have already acquired
Netscape) would be the most likely candidate. One of
their goals is to attract as many users as possible
and they already have a distribution agreement with
Real. By acquiring Real, AOL would be accumulating
Internet users which help fuel their growth. The
main thesis is that Real has a very large and
growing user base. Their product could be expanded
and complimented with other Internet services. That
is why it would be smart for a company with deep
pockets to pick them up while their stock is still
relatively cheap.
As for a buyout or merger, the price Real would
fetch, based on other mergers in the Internet space,
would be between $3 billion to $5 billion.
BancBoston Robertson Stephens recently raised 99'
revenue estimates from $95 million to $99 million.
Since Real has a history of consistent sequential
revenue gains, exceeding $100 million in revenues
should be a rather easy task for them, I feel. With
AOL's recent merger of Netscape, that will further
accelerate the number of people that use Netscapes'
browser and further accelerate the users that use
Real's software.
With Real having a market cap of $2 billion, their
stock is a low risk way of entering the Internet
space. In the event of merger or buyout, their stock could
command, at the high end, close to $200. Their
stock is not particularly overvalued, trading at
20 times 99' revenues. It may seem expensive but
it is really a fair valuation for an Internet stock.
They have a brand name that everyone knows and most
Internet surfers use. The shareholders of Real will
reap the rewards of a rock solid Internet company
that has their own special niche. Even without a
merger or buyout, their shares should double within the next
18 months, based on a strong brand name and their
ability to accumulate registered users. Keep in
mind that their stock is very volatile and can move
in spuratic price swings in both the up and
down direction.
Mark Johnson Editor IFC
(DISCLAIMER: The information is believed to be
reliable but there is no guarantee to its accuracy.
The stock idea mentioned above is not a solicitation
to buy or sell. I (Mark Johnson, Editor of the IFC)
am not paid any fees by the companies represented.
The stock idea may represent a starting point for
investors. People are encouraged to do their own
homework before buying any stock and are also
encouraged to contact an investment professional
before buying any securities. Neither Silicon
Investor nor the Internet Financial Connection
will be responsible for any loss occurring from
the purchase or sale of the above securities or any
securities.)
There is a thread that discusses RNWK on SI.
Subject 17262
-----------------------------------------------------------------
2.
techstocks.com
Jeffrey Bierman of Bierman Capital Management
(310-286-1881), provides the following stock
idea on OnSale (ONSL 43 1/2). Below is the
write up.
Last November, Jeffrey Bierman of Bierman
Capital Management wrote an article called
"Catching The Internet Wave" that was featured
here on the IFC. That article described the
Internet's potential and two favorite stocks
that Jeffrey liked. Those stocks were EarthLink
Network and DoubleClick. Since that article,
EarthLink has gone from $38 to $77 and DoubleClick
exploded from $33 to $102.
Inquiring minds would probably like to know what
he likes now. One Internet stock at the top of his
list is OnSale. They are an online auction web site
that specializes in selling refurbished and
close-out computers, peripherals and consumer
electronics. OnSale, now trading in the low 40's,
hit a high of $108, back in late November. OnSale
recently introduced a new web site called atCost.
This new site offers a fee-based pricing model,
rather than the traditional retail markup mode. In
addition, customers can see a detailed breakdown of
the wholesale cost and other charges before they buy
the product.
Jeffrey notes that OnSale is essentially selling
computers at cost in order to gain volume and market
share. He adds, Philip Morris often undercut the
price of their competitors to gain market share.
"OnSale is sacrificing cash flow for market share
and will eventually raise their prices to make their
business model work."
Jeffrey mentions that when a stock has been hit hard,
such as the shares of OnSale have, it creates a
tremendous amount of psychological damage. He compares
the effect to a car accident. When someone is hurt in
a car accident, they do not want to get back in the
car again. They need time to restore their confidence.
He feels that the same is true for OnSale. It will be
just a matter of time before investors get back in and
push their shares higher. Another interesting fact
Jeffrey states is that on-line auctioneer eBAY trades
at price to sales ratio (total market cap of the stock
divided by total annual revenues) in excess of 200.
OnSale trades at a price to sales ratio of under 5.
It is estimated that Onsale has 6.3 million shares on
the float. ViWes InvestInfo calculates that the total
number of shares that were short, (as of January 15,
1999), were about 3 million shares. Jeffrey thinks
that the shares of OnSale will move "significantly
higher" and short-covering will help propel the stock
but urges investors to be patient.
There is a thread that discusses ONSL on SI.
Subject 11909
------------------------------------------------------------------
3.
techstocks.com
Roland Whitcomb of the First American Technology
Fund provides the following stock idea on Covad
Communications (COVD 56 5/8). Below is the
write up.
Covad Communications is a recent IPO that was
brought public a few weeks ago. They are in the
business of installing DSL equipment primarily
to small businesses. DSL is generally used to
transmit high speed data over a traditional
copper telephone line.
"This is something that will have a lot of demand
going forward," says Roland Whitcomb of the First
American Technology Fund, "This is the telephone
company's way of responding to the threat of cable
modems." He mentions that it is difficult to
install a cable modem. A technician must come out
and install an IP connection. For a DSL line,
there is less work involved for the installation
process. Availability is a concern because cable
modems cannot be used everywhere. He believes that
if someone is simply looking for faster Internet
access, DSL would be a cheaper way to do so.
Before going public, Intel was Covad's leading
venture capital firm. Covad also has strong
relationships with, AT&T, Nextlink Communications
and Qwest Communications. "Those companies will
help market Covad's service," says Roland.
He adds, Covad operates in the core area that
everyone is speculating on. They are in a hot space,
have very strong and experienced management, have
good relationships with other vendors and position
within the industry... As a new issue, they are not
well known. Covad is expected to post revenues of
$50 million in 99' and possibly $200 million in 00'.
He mentions that Covads' stock has a market
capitalization of about $2.6 billion, which is high,
but when compared to other companies offering high
speed Internet connections such @Home, it is
"competitively priced" and offers tremendous
long-term growth.
There is a thread that discusses COVD on SI.
Subject 25019
---------------------------------------------------------------------
4. |
