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Why Blodget likes AOL and other select techs (an interview)...
February 19, 1999
Why Blodget Still Loves the Net
By Gerri Willis/SmartMoney
THE INTERNET ax is back. Henry Blodget, the CIBC Oppenheimer Internet analyst who correctly
predicted that Amazon.com's (AMZN) share price would hit $400 (presplit), made another call
Friday that is already making money for investors who listened. In a research note, the analyst
described the recent weakness in Internet stocks as an "opportunity to accumulate" leaders in the
sector. But he cautioned investors not to go too far in their zeal for anything with a dot-com in its
name. "Accumulate -- not bet the farm," he wrote. "The stocks could easily pull back further."
And, as if on cue, the stocks mentioned by Blodget rallied. Amazon.com ended the day up 13.2%,
while Yahoo! (YHOO) and America Online (AOL) jumped 5.7% and 2.8%, respectively.
We talked with Blodget over lunch near Battery Park City.
SmartMoney.com: It sounds like you weren't pleased with the coverage of your comments on the
group today. What's the problem?
Blodget: What I was saying is we thought earlier in the quarter that the stocks were very much
extended. We were expecting them to pull back and they have. Our call this morning was just to
say, OK, if you believe in the fundamentals in this sector, we feel better about starting to acquire
them now. We're in a period where they've already hit a lot of negativity. You're not going to get
totally nailed if you buy them now.
SmartMoney.com: But as we've established, these stocks are so volatile -- how can any individual
investor know when they're hitting lows?
Blodget: What I recommend is to take a long-term perspective. Do your analysis and wait until
something comes along, scares the market and the stocks fall 50%, then you can buy -- like now.
The Internet as an economic trend will produce a Microsoft-sized company at some point. The way
to find that company is to target three or four that have management teams that are motivated by
more than just short-term money, have demonstrated they can change with the market and are well
positioned now. If you invest $100 in each and just one of those becomes Microsoft-sized and the
others go to zero, then you've had a good rate of return.
SmartMoney.com: What companies do you like?
Blodget: We like Microsoft (MSFT), America Online, Yahoo, Amazon, eBay (EBAY),
Doubleclick (DCLK) and At Home (ATHM).
SmartMoney.com: Are you concerned that advertising revenue is declining for Internet companies?
Blodget: I haven't seen that. The growth rate may be slowing. You have to look at not just banner
spending, but direct marketing spending, sponsorship spending and electronic commerce
commission spending. If you look at all of those, ad revenues are growing at 100% a year. I don't
think it's slowing down.
I was incredibly encouraged by AOL's recent announcement that First USA will spend a minimum of
$300 million and maybe as much as $500 million over the next five years to be the exclusive
marketer of credit cards over AOL. What's encouraging to me about it is that First USA and AOL
have done business for three years. So First USA knows what it's worth -- and they're committing
dollars again.
SmartMoney.com: What's the next big M&A deal in the sector? Will any other dark horses -- like
Barry Diller's USA Networks (USAI) -- emerge as acquirers?
Blodget: There are two distinct kinds of M&A in this space. One is transactions within the industry
where Yahoo buys Geocities. And, then there are transactions with established companies, like
Disney and Diller. With those companies you won't get a premium. If you're looking for a takeout
premium you have to think about who the buyer is and does that buyer have an inflated currency to
make acquisitions.
I still think that some of the bigger media companies will expand. Time Warner (TWX) wouldn't
surprise me. News Corp. (NWS) wouldn't surprise me, and CBS (CBS), even though they just
bought a bigger piece of Sportsline (SPLN).
One of the misconceptions the market has had is that everyone on the Internet is just waiting for the
day content comes on the Internet. Internet content is transactions, interactions, searching,
hooking up with people. It's something fundamentally different from television or print and I don't
think that porting old media products to the Net will be an advantage. In fact, I think it's a
disadvantage. The value in market capitalizations will ultimately be in companies that do things that
couldn't exist without the Internet. Time Warner has Pathfinder with its content. But what they don't
have is Internet content. They don't have a real portal brand.
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