BANCBOSTON ROBERTSON STEPHENS
Keith E. Benjamin, CFA - mailto:keith@rsco.com
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August 6, 1999
The Web Report - Volume 2, Issue #31
This week, the NETDEX index decreased 11% to 462.7, compared
to the NASDAQ, which decreased 3%.
INVESTOR CONFERENCE ATTRACTS CROWDS OF POTENTIAL BUYERS - We
see signs of capitulation, with some individual traders
getting caught with margin calls and being forced to sell.
When will institutional investors step in with available
cash? Strong attendance at BancBoston Robertson Stephens'
Investing in Innovations conference this week surprised us.
August is typically not an active investing month. We
interpret the event's popularity as a sign that
institutional investors are looking to more aggressively buy
these stocks sooner rather than later. We believe many have
been waiting to buy since before reporting season. We will
be posting our presentations at this week's conference at
www.internetstocks.com.
DOES PROFITABILITY MATTER? We noticed some relatively
negative reactions this quarter to companies postponing
profitability, including Amazon and CNET. Acquisitions have
also been increasing non-cash goodwill and amortization
charges, including TicketMaster Online CitySearch. We
believe each company's investment in brand, audience, and
new product and service offerings will provide attractive
returns. However, we note a slightly higher sensitivity to
profitability among investors anxiously trying to figure out
how to differentiate between too many stocks. For example,
Modem Media Poppe Tyson's stock jumped when it reached
profitability early. On the other hand, InfoSpace broke
into profitability without a positive reception. Generally,
we have observed that the highest valuations have been paid
to those companies attacking the biggest market
opportunities with the widest leadership positions,
particularly the few brands that appear to have sustained
momentum, like Yahoo!
THINK LIKE A VENTURE CAPITALIST - It is difficult not to
become distracted by daily movements in these stocks. We
have found it is particularly difficult to use absolute or
relative valuation metrics as a tool to pick near-term
bottoms and tops. Instead, we try to remain somewhat
disciplined about accumulating stocks based on improving
fundamentals. When making an initial private investment,
the more important criteria are size of opportunity,
strategy, and management. Between first and subsequent
private rounds of investment, valuation remains less
important than relative progress in making good, long-term
venture judgements. In the end, a few big winners, private
or public, can make up for lots of losers.
We believe the opportunity remains for big moves in the
group and individual stocks, based on our belief that we're
just starting to see people spend money online. We expect
investors will return and focus on accelerating growth from
the September to December quarters, driven mainly by higher
levels of personal online shopping. We see some near-term
catalysts before next reporting season, with news expected
in August from Lycos, which reports on the 16th of the
month, and from Stamps.com and Student Advantage, both of
which are preparing to launch new services in September.
AOL WAKES UP MICROSOFT - Last week, Microsoft tried to hack
into AOL's instant message network. This week, Microsoft
threatened more aggressive promotion of its far-lagging
access service. We view these moves as more a sign of
Microsoft's acknowledgement that AOL now has significant
power over its customer base, now threatening Microsoft's
software stranglehold by infiltrating consumer PCs with
multiple software programs. We expect Microsoft may be able
to consolidate some of the ISPs, who have been struggling to
compete with AOL. AOL has been able to maintain it leading
share of over 50%, in the face of lower priced competition
for the past few years. Like AOL's CompuServe, Microsoft
proposes to pay a bounty to PC companies to compensate for
discounted or free PCs. Of course, it is not really free,
because the consumer must guarantee to pay for access for at
least 2-3 years. Bundled access prices range from $9.95 to
$21.95 per month. There is also consideration of promotions
of free access in exchange for minimum commitments to buy
from Microsoft-hosted stores. We don't expect price will be
any more effective today at diminishing AOL customer loyalty
than it has been for years.
WHAT WILL HELP AOL'S STOCK? - We would not be surprised by
pressure on the stock, until we see evidence that discounts
from Microsoft or others do not diminish AOL's ability to
meet its core and CompuServe subscriber growth estimates.
Summer subscriber growth has not been as impressive as the
dramatic growth in Web-based services, most notably with
ICQ. We estimate total net subscriber additions for the AOL
brand in the September quarter will be 900,000, including
800,000 for domestic and 100,000 for international AOL brand
members. This compares with a total of 750,000 subscribers
added in the June quarter. This almost flat sequential
growth is seasonally normal, in our view. We expect a
natural pick-up in demand by October when the next software
version, 5.0, is scheduled for release. Previously, the
associated disks and download programs boosted new
subscriber growth. As such, we remain confident in our
estimates.
Looking past subscriber growth, we expect AOL to again
experience accelerating commerce activity. Each deal
appears to be growing with AmericanGreetings.com just
agreeing to an expanded $100 million deal. Further, we
believe AOL's non-subscriber reach is being
under-appreciated. As we see more evidence of AOL extending
its reach to new devices, we expect our understanding of the
power and math to increase. This week, AOL invested in
Radiant Systems, which provides point-of-sale devices for
web access in gas stations, restaurants, etc. for quick Web
fixes. While this may seem trivial, it highlights the need
for easier access to eMail and other Web services, like
stock quotes.
AT WHAT PRICE WILL MORE INVESTORS CARE? - The stock is
close to levels where we can justify the valuation on a P/E
basis, with estimated C2000 EPS of well over $0.75 and
estimated growth in excess of 50%. If the stock falls more
than an additional $10, it would seem compelling to us on a
current multiple-to-growth-rate basis. In previous periods
of confusion and correction, the stock has rarely stayed
down for long.
eTailing Update - Lauren Cooks Levitan -
This week the eTailDEX decreased 1.6% to 910 from 925 last
week. Our confidence that the impending 1999 Cyber-Holidays
are likely to generate consumer and investor enthusiasm for
eTailers and their stocks, respectively, is buoyed by the
continued underlying strength in fundamentals we are seeing.
During my speech at the BancBoston Robertson Stephens
conference this week, I focused on the major shift in how
people are spending their time on-line. We are struck by the
dramatic increase in shopping reach from 50% during June
1998 to 67% reach during June 1999. We continue to remain
focused on those brands that we believe are best preparing
themselves for anticipated seasonal growth including Amazon,
eBay and eToys. We also continue to focus on those
companies we see representing the best examples of Clicks
and Mortar businesses; in other words, those companies
melding online expertise with real world advantages such as
Alloy Online and Global Sports. You can hear the conference
speech on our site, www.internetstocks.com.
ALLOY ONLINE EXTENDS REACH WITH EXCITE PARTNERSHIP - Alloy
announced a broad one-year marketing partnership with
Excite@Home this week. Similar to its deal with Yahoo!
(announced last week), Alloy will be prominently featured in
site areas that are popular with teens. We believe this
deal, coupled with Alloy's other portal partnerships, should
drive substantial increases in traffic for Alloy and could
result in better-than-expected revenues. In our opinion,
Alloy has been overlooked by many investors, and the stock
has reacted with indifference to the company's recent
marketing announcements. Given Alloy's positioning going
into the back-to-school and holiday seasons, when we believe
the company could capture significant share of the Gen Y
wallet, we look for Alloy's stock to rebound above its
recent high by year-end.
INITIATING COVERAGE OF GLOBAL SPORTS, INC. - This week, we
initiated coverage of Global Sports, Inc. (GSPT) with a Buy
rating. We believe Global Sports is a great example of
eTail/retail convergence, having established a unique
strategy to address the online component of the highly
fragmented U.S. sporting goods market, which we believe will
be at least $4 billion by 2003. Global Sports has entered
into agreements with 6 of the top 18 U.S. sporting goods
retailers, including Sports Authority and Athlete's Foot,
that have combined annual sales of over $3 billion. Under
the agreements, Global Sports records all of a retailer's
online sales in return for a license fee. Currently, Global
Sports recognizes over 90% of its retail partners' online
sales and handles business aspects including merchandising,
buying, warehousing, order fulfillment and customer service
for the Web sites, incorporating all existing and new
partners into the same backend infrastructure. Global
Sports also maintains pricing and merchandising policies
consistent with each of its retail clients, allaying
vendors' fears of discounted web merchandise and, in turn,
enabling it to offer a dominant selection of sporting goods.
We expect announcements of additional partners, as well as
sales and traffic growth driven by the combined marketing
power of its clients, to serve as catalysts for stock price
appreciation.
eFinance Update - Scott Appleby - mailto:scott@rsco.com
We are happy to introduce Scott Appleby, who joined us to
cover the eFinance market, including a focus on the
eBrokerage segment. Dramatic changes are driving big
opportunities in this very large business, in our view.
TRADING WORLD GETS WAKE-UP CALL FROM ECNs - We anticipate
the growing role of electronic communications networks
(ECNs) to affect exchanges like New York and NASDAQ as well
as the leading eCommerce market makers like Knight/Trimark
(NITE). ECNs are computerized trading networks that take
corresponding electronically-entered buy and sell orders and
match them automatically. With no immediate match, orders
are put on the NASDAQ national quote system.
Several of the ECNs are partly owned by brokerage
businesses. For example, Datek and Waterhouse both own
Island, and E*Trade owns a stake in Archipelago. We believe
this is important because owners have greater incentives to
direct orders to ECNs. In addition, ECNs are now permitted
to register as official stock exchanges, enabling them to
derive revenues from selling their own stock-quote data,
which opens the door to trading New York Stock
Exchange-listed stocks in addition to NASDAQ issues. Also,
the larger ECNs would be well positioned to provide after
hours trading due to the existing orders already in its
system.
THE POWER OF ECNs - ECNs are heralded for their anonymity,
automation, and leverage. The "anonymity" comes from the
trading network, whereby the computer behaves as both the
buyer and seller when looking for a match. The "automation"
is less subtle: the computer simply executes (instantly to
fractions of seconds) those trades where there is a match.
It is lauded for "leverage" because the ECN's effectiveness
increases as more orders are directed its way.
THE DRAWBACKS OF PRESENT ECNs - An execution occurs only
when there is an exact match for price and size. The average
order size for an ECN is 300 shares. NITE, on the other
hand, can provide automatic execution on over 2000 stocks up
to 2,000 shares. ECNs can not guarantee liquidity, the
assurance that there will be buyers or sellers for a trade;
or immediacy, the ability to get an order matched now versus
later.
KNIGHT/TRIMARK WELL POSITIONED, IN OUR VIEW - Currently, we
believe Knight/Trimark is the best venue for all orders.
With much of the functionality of an ECN, it provides both
liquidity and immediacy. First, by automatically executing
roughly 60% of all its orders, NITE operates like a de facto
ECN. For orders where no match exists, NITE uses technology
and capital (including human) to buy and sell customers'
shares, which we see as vital when counterparties are in
short supply. ECNs recognize this role and are speaking to
NITE to "enhance" liquidity for both market and limit
orders. Thus, we believe NITE gives you the best of both
worlds. Enhanced liquidity tells the tale -- NITE was
responsible for approximately 14.3 billions shares of
NASDAQ/OTC stock in Q2 versus an estimated 17.8 billion
combined for the 10 largest ECNs. We believe NITE is the
best investment vehicle to capture the secular growth of
online trading.
Internet Enablers Update - John Powers- - mailto:JP@rsco.com
This week in the NetworkStocks newsletter, John and his team
look in depth at RealNetworks. He believes RNWK is one of
the best franchise names in his space, so let him tell you
why. If you have ever used the Web to listen to streaming
music or watch video, chances are very good that you've been
a first-hand user of RealNetworks' technology. As broadband
becomes more pervasive, John believes the market for
streaming content will expand enormously. To get the full
picture from our NetworkStocks gang, subscribe by writing to
mailto:NetworkStocks@rsco.com or go to www.networkstocks.com
and subscribe from the site.
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Ticker Rating Price Price
8/5 7/29 1-Wk 52-Wk Chg
Chg High 52Wk
7/29 High to
to 8/5 8/5
ALOY BUY $9 1/4 $12 -23% $23 1/6 -60.1%
AMZN SBUY $97 1/4 $101 4/7 -4% $221 1/4 -56.0%
AOL SBUY $83 3/4 $99 1/4 -16% $175 1/2 -52.3%
ASKJ BUY $30 $42 -29% $77 4/5 -61.4%
AWEB BUY $10 $12 5/8 -20% $50 -79.9%
BYND BUY $16 1/2 $21 -21% $41 1/3 -60.1%
CBDR BUY $6 1/4 $9 3/4 -36% $17 3/8 -64.0%
CDNW MP $15 7/8 $20 4/7 -23% $39 1/4 -59.6%
CMGI NR $80 $93 1/2 -15% $165 -51.6%
CNET BUY $35 7/8 $39 1/5 -8% $79 3/4 -55.0%
DRIV BUY $20 4/7 $23 7/8 -14% $61 3/8 -66.5%
DCLK NR $80 3/8 $81 7/8 -2% $176 -54.3%
EBAY BUY $92 7/8 $102 1/4 -9% $234 -60.3%
EGGS NR $7 1/4 $9 1/8 -21% $40 1/4 -82.0%
ETYS BUY $33 1/8 $42 4/5 -23% $85 -61.0%
ATHM NR $44 7/8 $47 -5% $99 -54.7%
GMST SBUY $58 1/8 $61 7/8 -6% $77 1/2 -25.0%
GETY BUY $17 4/7 $18 -2% $30 1/2 -42.4%
INSP BUY $43 3/4 $46 4/9 -6% $72 5/8 -39.8%
LCOS BUY $35 1/3 $43 1/8 -18% $72 2/3 -51.4%
MQST BUY $9 1/3 $14 4/5 -37% $31 7/8 -70.8%
MMXI BUY $39 $37 1/4 5% $56 5/8 -31.2%
MMPT BUY $25 $21 1/4 18% $55 1/8 -54.6%
MLTX BUY $17 5/8 $20 7/8 -16% $72 1/6 -75.6%
NETG NR $21 $22 1/8 -5% $66 7/8 -68.7%
NETP BUY $11 4/9 $15 -24% $35 -67.3%
NSOL BUY $60 3/8 $67 4/9 -10% $153 3/4 -60.7%
NEWZ MP $7 1/5 $7 3/4 -7% $14 1/4 -49.6%
ONSL NR $13 3/4 $17 -19% $108 -87.3%
PCLN SBUY $78 1/8 $80 1/2 -3% $165 -52.7%
PTVL BUY $18 3/4 $22 5/8 -17% $36 -47.9%
SEEK MP $33 2/3 $41 -18% $100 -66.3%
SPLN BUY $20 1/2 $24 -15% $59 1/4 -65.4%
STMP BUY $31 1/2 $31 1/2 0% $52 1/2 -40.0%
STRM BUY $9 7/8 $9 7/8 0% $70 -85.9%
STAD BUY $11 1/8 $12 1/5 -9% $15 1/4 -27.0%
TMCS BUY $28 1/4 $34 3/8 -18% $80 1/2 -64.9%
SRCH BUY $8 4/7 $9 7/8 -13% $17 3/8 -50.7%
VUSA BUY $11 3/4 $15 1/5 -23% $74 1/4 -84.2%
XMCM BUY $36 3/4 $43 1/2 -16% $98 1/2 -62.7%
YHOO BUY $128 3/8 $137 -6% $244 -47.4%
UBET BUY $6 3/4 $8 1/3 -19% $17 7/8 -62.2%
NETDEX 462.74 520.12 -11.0% 801.41 -42.3%
KEBDEX 695.64 785.86 -11.5% 1,273.17 -45.4%
COMQ 2,565.81 2,640.01 -2.8% N/A N/A
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Source: AT Financial Information and BRS Estimates
BancBoston Robertson Stephens maintains a market in the
shares of Alloy Online, Amazon.com, AutoWeb,BackWeb,
Beyond.com, CareerBuilder, CDNow, CMG, CNET, Digital River,
DoubleClick, eBay, Egghead, eToys, E*Trade, Excite @Home, f5
Networks, Fatbrain, Gemstar, Getty, GlobalSports, Infoseek,
InfoSpace.com, Inktomi, ISS Group, Knight/Trimark,
Microsoft, Modem Media Poppe Tyson, Legato, Lycos,
Multex,Mapquest.com, Media Metrix, Mpath, Microsoft
Corporation, NetGravity, Net Perceptions, Network
Solutions, NewsEdge, ONSALE, Portal Software, Priceline.com,
Preview Travel,RealNetworks, Security Dynamics, SportsLine,
StarMedia, TicketMaster Online-CitySearch,Youbet.com, Value
America, VeriSign, Xoom.com and Yahoo! and has been a
managing or comanaging underwriter or has privately placed
securities of Alloy Online, AutoWeb, BackWeb, Beyond.com,
CareerBuilder, Digital River, eBay, Egghead, eToys, E*Trade,
Excite @Home, f5 networks, InfoSpace.com, Knight/Trimark
Legato, ISS Group, Modem Media Poppe Tyson, Multex,
Mapquest.com, Media Metrix, Mpath, NetGravity, Net
Perceptions, Network Solutions, ONSALE, Portal Software,
Priceline.com, Preview Travel, RealNetworks, Security
Dynamics, StarMedia, SportsLine, TicketMaster
Online-CitySearch, VeriSign, Youbet.com, and Value America
within the past three years.
* BancBoston Robertson Stephens is acting as advisor in the
merger between Alta Vista and CMGI. In keeping with firm
policy,our rating on CMGI goes to No Rating.
** BancBoston Robertson Stephens is acting as advisor in the
merger between NetGravity and DoubleClick. In keeping with
firm policy,our rating on DoubleClick goes to No Rating.
*** BancBoston Robertson Stephens acted as an advisor in
Excite @Home's aquisition of iMall; in keeping with firm
policy, our rating on Excite @Home goes to No Rating
Rating Definitions: The following are basic definitions for
our recommendation ratings.
Strong Buy - Rating for a stock, which we believe could have
significant, positive price movement near-term and/or
represents outstanding competitive and business model
potential. Therefore, we would be aggressive buyers of the
stock.
Buy - Rating for a stock, which we recommend buying, however
believe there may not be near-term news or events to move
the stock price.
Long-Term Attractive - Rating for a stock, which we believe
could have long-term value, however we would not necessarily
recommend buying.
Market Performer - Rating for a stock, which we believe will
perform at, or below, market levels.
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Unless otherwise noted, prices are as of the close August 5,
1999.
FOR ADDITIONAL INFORMATION, PLEASE CALL YOUR BANCBOSTON
ROBERTSON STEPHENS REPRESENTATIVE AT (415) 781-9700.
The information contained herein is not a complete analysis
of every material fact respecting any company, industry or
security. Although opinions and estimates expressed herein
reflect the current judgment of BancBoston Robertson
Stephens, the information upon which such opinions and
estimates are based is not necessarily updated on a regular
basis; when it is, the date of the change in estimate will
be noted. In addition, opinions and estimates are subject to
change without notice. This Report contains forward-looking
statements, which involve risks and uncertainties. Actual
results may differ significantly from the results described
in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those
discussed in "Investment Risks." BancBoston Robertson
Stephens from time to time performs corporate finance or
other services for some companies described herein and may
occasionally possess material, nonpublic information
regarding such companies. This information is not used in
the preparation of the opinions and estimates herein. While
the information contained in this Report and the opinions
contained herein are based on sources believed to be
reliable, BancBoston Robertson Stephens has not
independently verified the facts, assumptions and estimates
contained in this Report. Accordingly, no representation or
warranty, express or implied, is made as to, and no reliance
should be placed on, the fairness, accuracy, completeness or
correctness of the information and opinions contained in
this Report. BancBoston Robertson Stephens, its managing
directors, its affiliates, and/or its employees may have an
interest in the securities of the issue(s) described and may
make purchases or sales while this report is in circulation.
BancBoston Robertson Stephens International Ltd. is
regulated by the Securities and Futures Authority in the
United Kingdom. This publication is not meant for private
customers.
The securities discussed herein are not FDIC insured, are
not deposits or other obligations or guarantees of
BankBoston N.A., and are subject to investment risk,
including possible loss of any principal amount invested.
Copyright * 1999 BancBoston Robertson Stephens Inc. |
