Strong buy rec from Kinnard:
Net Perceptions (NETP - $13 5/8) STRONG BUY Price Target $60
MARKET OPPORTUNITY
We believe that with its current analytical software product and service line, Net Perceptions has an
addressable market of up to 30,000 customers with a lifetime value of at least $500,000, for a total of a $15
billion market for its solutions. Support for this market can be found in recent Forrester and IDC reports.
Forrester Research indicates that companies will spend $14.5 billion on e-commerce software in 2003,
while IDC reports that the ASP market, a market Net Perceptions has recently entered, will be almost $7
billion by 2004. Further development of its product line could make the addressable market for Net
Perceptions conservative.
GROWTH STRATEGY
We believe that Net Perceptions can grow revenues at 40%+ for the next several years. The company’s
ability to achieve this will depend on the success of their channels and the breadth of its offering:
Channels – sales force (39 quota-carrying, 81 total at the end of Q2), indirect channels, including resellers
(such as i2 Technologies) and OEM relationships (such as Vignette). Also, Net Perceptions recently
announced the availability of certain solutions by way of an ASP model.
Products – Net Perceptions for E-Commerce, Call Centers, Marketing Campaigns and Knowledge
Management have been the legacy offerings. The recent acquisition of Knowledge Discovery One (KD1)
added data mining and analysis features now offered as Net Perceptions Intelligence for Advertising and
Net Perceptions Intelligence for Retail. Net Perceptions now offers its solutions through an ASP model
known as the Personalization Network.
SHORT-TERM CATALYSTS
Acquisitions – The KD1 acquisition has been integrated smoothly into Net Perceptions’ offering. We
believe that KD1 was a highly complementary business and that the acquisition made sound strategic sense.
While its stock isn’t quite the same currency that it was six months ago, Net Perceptions is armed with over
$100 million in cash, and could look to make another strategic acquisition down the road.
Big game hunting – Adding additional high-profile customers for its solutions adds more significant
revenue, and perhaps more importantly adds great credibility to a company that is still in an early stage in
its development.
Sector turnaround – So-called B2B plays, specifically Internet software stocks, had significant portions of
their market caps stripped away in late March and April. While it appears that they have since bottomed
out, we believe that another upward surge could occur. The stocks may have slowed, but the businesses
have not.
VALUATION
We continue to believe that Net Perceptions can grow revenue (including acquisitions) at least 40%
annually for the next 4-5 years. We are expecting $51 million in revenue for 2000 and roughly $80 million
in 2001. Applying an 18-20 multiple to 2001 revenues suggests a $1.5 billion market capitalization, or
approximately $60 per share. Relative to its peers, Net Perceptions still trades at a significant discount
which we continue to believe is unjustified. Net Perceptions is trading at 4.9X 2001 revenues versus the
average multiple on revenues of the peer group of 20.1X. We believe this gap will shrink over the next
year. We believe that at current levels, shares of Net Perceptions offer a very compelling growth
opportunity relative to other high-growth software and e-solutions providers.
COMPANY DESCRIPTION
Net Perceptions is the leading supplier of real-time personalization solutions that enable businesses to
market to customers on a true one-to-one basis across multiple touch points. Net Perceptions’ solutions
increase new and repeat business on the web and in call centers by learning more about each customer’s
individual needs, tastes and preferences with every interaction, then making increasingly personalized
product and service recommendations. Net Perceptions, based in Minneapolis, is a publicly held company
which operates additional offices in New York, San Francisco and England and a joint venture office in
Japan. Customers include many of the world’s best known brands including: CDNow, Fingerhut, Kraft
Foods, Lycos, Micron Electronics, Procter & Gamble, Sony, Tower Records, Time Warner and Williams-Sonoma. |
