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BANCBOSTON ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
mailto:Keith@rsco.com
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May 7, 1999
The Web Report - Volume 2, Issue #18
This week, the NETDEX index closed down 12.5% from last week at 899.05.
For comparison, the NASDAQ ended the week down 1.9% from last week.
Our benchmark for valuation remains those non-Internet companies that
have been around long enough to allow calculation of value based on
current earnings. This week the market capitalization of the 91
companies in the NETDEX index is approximately $369.10 billion. This
compares to the top 20 media companies, which have a combined market
capitalization of approximately $483.2 billion. In the retail category,
Wal-Mart's market capitalization is approximately $184.1 billion.
RIDING THE CONTINUING WAVE PATTERN - We are encouraged by another
healthy drop in the group. We believe investors need to take a break in
order to feel comfortable buying more stock. We have seen a wave
pattern with the companies boasting bigger market opportunities and
better business models riding the wave to higher levels almost every
quarter. This leaves a few stocks seeming to miss the wave and drift.
We continue to focus on the larger franchises where we see company's
demonstrating accelerating growth that we believe will justify
significantly higher valuations and where we can see near-term catalysts
before next reporting season. Our favorites include Amazon.com,
Priceline.com, Lycos, and TicketMaster Online-CitySearch.
A FEW STOCKS STILL TO REPORT - ValueAmerica reports next Monday; and
Lycos on May 18th.
VALUE AMERICA - WE SEE A COMPELLING SHOPPING MODEL - We initiated
coverage of Value America with a Buy rating this week. Value America
resells leading branded products at a discount online. The company has
established relationships with over 1,000 brands, by aggressively
advertising the value of brands, in exchange for cooperative advertising
dollars. We believe Value America offers consumers both brand and
selection, at a fair price. More importantly, it is targeting modest
gross margins in order to support extensive customer service and assure
product fulfillment. Approximately 98% of orders are shipped directly
from the vendor within the first day after an order is placed. We
believe Value America can scale to be one of the few big Web commerce
destinations. We expect the company to report upside to our estimates
of $21.4 million in revenues and EPS of ($1.44) when it reports Q1
results on Monday, May 10th.
LCOS - NEWS PENDING IN MAY - As Lycos grows continually larger, we see
significant catalysts for the stock. These include the company's filing
of the merger proxy enabling it to talk more about the benefits of the
merger. If the reception is weak, we could see improvement of the
terms. If the vote fails, Lycos could become a jump ball for other
bidders, which generally now have more expensive currencies. We also
expect a strong quarterly report in May, based on recent gains in
traffic compared to Yahoo!'s. The proposed combined company would have
some strategic and size advantages over Yahoo!, in our view. We expect
the stock will rise under most of the circumstances we envision.
PRICELINE - CONSUMERS ADOPTING NEW MODEL QUICKLY - Priceline.com
reported Q1 revenues of $49.4M and EPS of ($0.12), well above our
estimates of $42.0 million and ($0.14). We have been surprised by how
quickly consumers have adopted this model, which allows consumers, and
eventually businesses, to name their own price for goods and services.
For reference, the company sold more than 330,000 airline tickets in its
first 12 months of operation, for an average of 6,200 tickets per week.
Priceline is now selling an average of more than 25,000 tickets per
week. We expect the stock can effectively be driven as the company
reaches milestones of traffic, revenues, new categories, deals, etc.
Its brand has very quickly achieved brand recognition on par with the
Web leaders, suggesting the power of the service. We believe the
concept has compelling applications for business-to-business
transactions long term. We believe Priceline.com is a new and
differentiable Web business model that can grow into a very large
valuation, at the high end of even the top companies. As such, we
raised our rating to a Strong Buy this week.
BROADBAND LANDSCAPE CONSOLIDATING WITH AT&T BUYING MEDIA ONE - AT&T won
the bid for MediaOne this week, widening its leading footprint in the
cable market, giving it greater broadband reach. With AT&T's ownership
interest of @Home, it appears to strengthen its competitive position at
the expense of AOL. MediaOne's partial ownership of the Time Warner's
Roadrunner broadband service may increase the prospects for a
partnership between Roadrunner and @Home. Regardless, we believe AOL's
customers will remain loyal, allowing it the time to negotiate
alternative broadband arrangements, as it has started with telephone
companies. For example, AT&T cable competitors may be more inclined to
do a deal with AOL to help balance power. As such, we continue to favor
AOL, although we don't see near-term positive catalysts for the stock.
GEMSTAR COULD BENEFIT FROM MICROSOFT'S PIPE DREAMS - Gemstar needs to
distribute its Electronic Program Guide (EPG) to households through
either TV sets, VCRs, or cable boxes. We believe that once the guide is
in 2 million households, which we expect by the end of 1999, Gemstar can
begin to sell meaningful amounts of advertising. We believe the guide
can reach 5 million households by the end of 2000 through the
relationships Gemstar has with almost every major TV and VCR
manufacturer, which include a copy of the guide in their products. We
believe that including the guide in cable boxes could make that ramp
even faster. Progress with the cable industry has been slow as
box-makers and MSOs have attempted to test the validity of Gemstar's
patents in court. Microsoft plans to invest $5 billion in AT&T in
exchange for having Windows CE become the standard operating system in
cable boxes used on AT&T's cable system, which will be the largest in
the U.S. following the TCI and Media One acquisitions. Microsoft
licenses Gemstar's guide for use in Windows CE and shares associated ad
revenue with Gemstar. We believe that Microsoft's involvement may
encourage AT&T to encourage TCI to encourage TV Guide to settle its
dispute with Gemstar, possibly speeding up Gemstar's pace of penetration
into households by as much as a year.
E*TRADE - EXPANDS MARKETING AGREEMENT WITH AOL - Demonstrating the
strength of its initial marketing deal with AOL, E*Trade signed an
additional multi-million dollar deal with the company. To review the
initial agreement, E*Trade paid AOL $25 million over 2-years, to receive
preferred positioning on AOL's Finance Channel. Under the new deal,
E*Trade broadens its reach on the AOL service by receiving placement
throughout the News, Entertainment and Computing Channels, which
according to Media Metrix data, are the top 3 trafficked sites in the
news/entertainment/information category. In addition to these channels,
E*Trade will be placed on AOL's mailbox and sign off pages. We believe
the extension of this relationship illustrates the effectiveness and
efficiency, in terms of lower customer acquisition costs, of the AOL
brand. Of other interest, E*Trade's reach in March exceeded the
combined reach of Charles Schwab & Co. and Ameritrade Web sites,
according to Media Metrix March.
GETTY - REPORTS Q1 AND ENTERS THE CONSUMER MARKET - Getty reported
revenues of $52.2 million, and EBITDA per share of $0.30, slightly above
our estimates. Transition to digital, now at 39% of revenues, is
occurring faster than expected. Getty also announced that it has
acquired Art.com, which allows consumers to buy art online, for 4.5
million shares plus some performance-based payments. Through Art.com,
consumers can browse and purchase from a database of over 100,000
pictures. We view this acquisition as step one in a multi-step process
of tapping into the large consumer marketplace for art and photography.
We believe the consumer business could help Getty accelerate its current
growth rate of approximately 15%. We are encouraged that the company is
now making more aggressive investments to accelerate the growth of its
Web businesses, potentially sacrificing near-term EBITDA for faster
revenue growth now and higher earnings later. We would not be surprised
to see additional announcements, similar in nature, which could help
transition Getty into a complete photo portal, both on the business and
consumer side of the business. The next version of the site is
scheduled for launch in the second half of 1999. Through this site, the
company plans to offer enhanced search functionality of the very best of
its licensed, royalty free, archival, sports and 3rd party images. Getty
is currently securing content and partnerships to drive traffic to the
site. We believe the stock could surprise us over the immediate and
long term.
NETWORK SOLUTIONS - DOUBLES SIZE OF AFFILIATE PROGRAM - Despite the
confusion over competition, we believe NSOL is continuing to build its
marketing momentum. For example, this week, Network Solutions announced
that its Affiliate Program surpassed 11,000 members at the end of April,
up from 5,000 at the end of March. The Affiliate Program enables members
to create a link for their Web visitors directly to Network Solutions'
service offerings. Members receive a percentage of each sale as a
referral fee. The top 10 Affiliate members average about 500,000
impressions per month on their Web sites. About 20% of the members are
international.
INFOSPACE.COM - STOCK SPLITS 2-FOR-1- Infospace.com's stock split,
effective Wednesday, May 5th. We put this stock near the top of our
list of franchises to buy as the group dips.
MODEM MEDIA POPPE TYSON - Modem Media reported strong Q1 results,
including revenues of $12.4 million and a per share loss of ($0.05),
well above our estimates of $10.5 million and per share loss of ($0.14).
We believe MMPT's impressive results in a seasonally slow Q1 demonstrate
the strength of the core business model of concentrating on fewer,
larger clients. MMPT continues to retain existing accounts while
strategically adding large, sustainable clients such as GM Europe, 3M,
GE and ChipCenter in Q1. We believe this model can result in steady,
modest upside to our estimates with the potential for much larger upside
under future expected pay-for-performance. MMPT added another
undisclosed client under the pay-for-performance model and expects to
grow the current total of 2 to 4 by the end of 1999. We expect the
stock to work higher over the course of the year as momentum in the base
business provides modest upside to our estimates. Long-term, the shift
to a pay-per-performance model could provide a more open-ended
opportunity for earnings and the stock.
eTailing Update - Lauren Cooks Levitan 415-693-3309,
mailto:lauren@rsco.com
AMAZON - CONFUSION OFFERS INVESTORS OPPORTUNITY - Shares of Amazon
continued to drift lower this week following the announcement of the
company's first-quarter results. The biggest single concern appears to
be the growing worry that Amazon's large near-term investments may
either delay or prevent long-term profitability. We believe Amazon is
quickly building one of the Internet's most dynamic and scalable
business models, such that its current investments should drive
considerably higher top-line growth and eventually greater profits. We
expect investors will gain a better appreciation for Amazon's growth
opportunities as the company reveals its strategic investments and
business development plans. We don't question if there are additional
businesses the company will enter which will partially explain the major
investments. Rather, we question how many new business categories
Amazon will enter in the near term and how quickly we will learn about
them. We continue to speculate that travel, software and toys are near
the top of the list. We recommend buying the shares in advance of what
we believe could be a flurry of positive announcements regarding further
investments or launches.
The confidence of Amazon investors was also tested this week by the
release of a report indicating U.S. books sales declined 3% in 1998.
While this news does not bode well for the bookselling industry as a
whole, we are not particularly concerned about its impact on Amazon
(which we note captured even more market share during 1998 than
previously believed, given the decline in overall book sales).
Specifically, we suspect book publishers may be more willing to
cooperate with Amazon during slower times given Amazon's increasing
importance to the book market. This could translate into greater coop
support, better terms in direct from publisher purchases, and improved
access to authors for special events. Plus, we do not believe Amazon's
ultimate success will be determined by the book category alone. The
company is constantly adding new layers to its business model through
strategic investment, acquisitions, and partnerships with other
e-tailers. Over time, these non-book businesses should define Amazon's
e-tail portal status.
MAKING SENSE OF DIGITAL MUSIC DELIVERY - We continue to wonder when and
from whom consumers will buy their digitally delivered music. Will it be
Amazon, CDnow, the major labels, or a soon-to-be-known e-tailer? One
startup, Musicmaker.com, postponed plans for its initial public
offering, citing ongoing negotiations for a license with "a major music
entertainment company" as the reason for the delay. While we can
envision several digital music scenarios, we believe unanimous agreement
on a single format standard among the major labels in response to the
increasingly popular MP3, is unlikely. The landscape continues to change
very quickly with most players in a race to have a working strategy in
place to capitalize on the seasonally important holiday season. This
week, Universal announced plans to sell music online in time for this
year's holiday season regardless of the industry's collective stance. On
the e-tailing front, we expect both Amazon and CDnow will be ready and
well-positioned to market digital music to their customers, but are
challenged to understand how significant sales volume could be in the
near-term. Our hunch is the delay in creating a standard is leveling the
playing field by slowing down the front runners and providing the
laggards time to catch up. In the beginning, we see the potential for an
overwhelming number of sites. Under this scenario, we would expect the
lesser known names to be likely acquisition targets and the better known
brands, such as Amazon, to capture significant market share. Looking
farther out to a predominantly broadband world, we suspect the marginal
e-tailers could be shut out of the equation. Our hunch is that we will
eventually be able to purchase music through our digital cable
connection and maybe even our phones. We believe this would render the
current debate regarding the format for securely delivery music
electronically virtually irrelevant.
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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
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may have an interest in the securities of the issue(s) described and may
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Robertson Stephens International Ltd. is regulated by the Securities and
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Copyright * 1999 BancBoston Robertson Stephens Inc.
Rating 5/06 4/29 1-Wk 52-Wk Chg
Chg High 52Wk Hi
4/29 - to 5/06
5/06 Price
Amazon AMZN SBUY 137 3/8 168 1/4 -18% 221 1/4 -37.9%
Am Online AOL SBUY 119 3/4 141 3/8 -15% 175 1/2 -31.8%
AutoWeb AWEB BUY 26 3/8 26 3/8 0% 50 -47.3%
Beyond.com BYND BUY 24 1/2 27 1/5 -10% 41 1/3 -40.7%
CDnow CDNW MP 16 2/3 16 5% 39 1/4 -57.5%
CMGI CMGI LTA 227 1/8 239 3/8 -5% 330 -31.2%
CNET CNET BUY 114 121 -6% 159 1/2 -28.5%
DigRiver DRIV BUY 33 37 3/8 -12% 61 3/8 -46.1%
DoubleClick DCLK BUY 117 147 -20% 176 -33.6%
Ebay EBAY BUY 175 1/2 215 -18% 234 -25.0%
Egghead EGGS BUY 14 14 0% 40 1/4 -65.2%
E*Trade EGRP BUY 105 116 -9% 144 1/2 -27.3%
Excite XCIT NR 157 143 5/8 9% 187 7/8 -16.4%
Gemstar GMST SBUY 116 3/8 110 1/4 6% 122 -4.6%
Getty GETY BUY 29 5/8 26 14% 30 1/2 -2.9%
InfoSpace INSP BUY 53 1/2 59 1/3 -10% 72 5/8 -26.3%
Lycos LCOS BUY 89 91 3/8 -3% 145 3/8 -38.8%
Modem Media
Poppe Tyson MMPT BUY 28 1/4 33 1/8 -15% 55 1/8 -48.7%
Multex.com MLTX BUY 36 1/4 44 -18% 71 1/2 -49.3%
NetGravity NETG BUY 31 38 5/8 -19% 66 7/8 -53.5%
Network Sol NSOL BUY 67 77 1/2 -14% 153 3/4 -56.4%
NewsEdge NEWZ MP 8 1/8 8 1/8 0% 14 7/8 -45.4%
Onsale ONSL BUY 24 1/2 25 7/8 -5% 108 -77.3%
Priceline PCLN BUY 139 4/9 137 4/5 1% 165 -15.5%
Preview Trv PTVL BUY 23 26 4/7 -13% 44 -47.7%
Infoseek SEEK MP 50 5/8 51 -1% 100 -49.4%
SportsLine SPLN BUY 33 1/2 39 3/8 -15% 59 1/4 -43.5%
TicketMaster Online
CitySearch TMCS BUY 28 5/8 32 1/2 -12% 80 1/2 -64.4%
Xoom.com XMCM BUY 68 71 -4% 98 1/2 -31.0%
Yahoo! YHOO BUY 151 7/8 175 -13% 244 -37.8%
NETDEX Index
NETDEX 899.05 1,027.13 -12.5% 1,148.55 -21.7%
KEBDEX Index
KEBDEX 1,351.46 1,552.67 -13.0% 1,757.25 -23.1%
NASDAQ Composite Index
COMQ 2,472.28 2,520.45 -1.9% N/A 40.8%(1)
(1) Change based on last 12-month's
performance.
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BancBoston Robertson Stephens maintains a market in the shares of
Amazon.com, CMG, CNET, Preview Travel, Digital River, DoubleClick, eBay,
Egghead.com, E*Trade, Excite, Gemstar, Getty, Infoseek, InfoSpace.com,
Lycos, Microsoft, Modem Media, NetGravity, Network Solutions, NewsEdge,
N2K, ONSALE, Preview Travel, Priceline.com, SportsLine, TicketMaster
Online-CitySearch, Xoom.com and Yahoo! and has been a managing or
comanaging underwriter or has privately placed securities of Digital
River, eBay, Egghead.com, E*Trade, Excite, InfoSpace.com, Modem Media,
NetGravity, ONSALE, Preview Travel, Priceline.com, TicketMaster
Online-CitySearch, Xoom.com and SportsLine within the past three years.
For additional information, call your BancBoston Robertson Stephens
representative at (415) 781-9700.
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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FOR ADDITIONAL INFORMATION, PLEASE CALL YOUR BANCBOSTON ROBERTSON
STEPHENS REPRESENTATIVE AT (415) 781-9700.
Unless otherwise noted, prices are as of the close Thursday, May 6,
1999. |
