How about YHOO?
AOL and Sony: Microsoft's
Worst Nightmare
By Paul DeMartino
The Internet Analystsm combed through research
submitted to the Multex.com database this week,
looking for Strong Buys. This column is intended as a
starting point for investment ideas in the Internet
industry, not as an ending point. The opinions
expressed in this column are those of the firms
mentioned, and not necessarily those of the author,
The Internet Analyst, or Multex.com. In order to be included in this column, a stock
must receive a firm's highest rating, and the valuation methodology must be included
in the report.
AOL TIME WARNER (MACR): Salomon Smith Barney released two reports on May
15, both of which rated AOL Time Warner as Buy. One was related to a news item,
and one examined a facet of AOL's business in depth.
The first report deals with AOL's HBO network. Salomon examines the network's
business model, and concludes that, between its original movie pipeline, its large film
library and its original programming (citing particularly The Sopranos, of course) HBO
is poised for stable, strong, long-term growth. The network's relationship with the AOL
company segment is the focus of the report, though. Salomon reports that only half of
HBO's subscribers have AOL service, so it gives the ISP access to an otherwise
untapped market. In addition, the combination of HBO and AOL in the future may
result in a film-on-demand service, either over cable lines or over the Internet. In any
case, the combination should allow AOL Time Warner to leverage more clout with
advertisers and other cable system operators.
The second report talks about AOL's recent agreement with Sony (SNE). AOL is to
offer some services over the PlayStation2. "The companies plan to incorporate many
of AOL's most popular features such as instant messaging, chat and e-mail into the
PlayStation2 console so that consumers will be able to communicate with others at
the same time as playing games," the firm reports. Salomon believes, though, that the
bigger news is gained by reading a bit between the lines: On the one hand, you have
AOL, and on the other you have Sony. And they're working together. Hmm. Why, it's
almost as if Microsoft's (MSFT) two thorniest rivals (in different arenas) have gotten
together to crush the Xbox before it's even released and at the same time place the
Internet into the living room. Plus, Salomon also believes that the long-term
ramifications of a Sony/AOL partnership are a major positive for both companies.
The valuation appears in the HBO report. Salomon projects share earnings of $1.20 for
2001 and $1.50 for 2002. Its $70 target price is based on a price-to-free-cash-flow
metric. AOL shares closed at $50.75 on May 15.
GEMSTAR-TV GUIDE INTERNATIONAL (GMST): On May 15, CIBC World Markets
reiterated its Strong Buy on Gemstar-TV Guide International. The provider of print,
publishing and Internet services announced first quarter 2001 results, prompting this
report. The company posted results that were strong, considering the economic
environment. Its revenue line came in at $352.5 million, which is down 2% from the
last quarter of 2000, but above CIBC's estimate of $344.6 million. Gemstar's pro forma
earnings before interest, taxes, depreciation and amortization (EBITDA) was $0.26 a
share, which was $0.01 above CIBC's estimate. The firm stated:
"Our primary conclusions are: 1) Gemstar posted solid financial results; 2) the
company closed several strategically important licensing deals; 3) Gemstar made a
savvy acquisition of SkyMall for $50 million in cash and stock; 4) the company is
wisely starting to shed legacy assets; 5) the IPG [interactive programming guide]
business is performing well; and 6) numerous potential catalysts could drive the stock
higher over the next several quarters."
The interactive programming guide part is the most important, in CIBC's view. It
provides most of the catalysts mentioned, and accounts for 60% of its valuation.
Despite the overall positive tone, the firm reduced its forward estimates based on
company guidance. For 2001, it now projects $1.36 billion in revenues, down from
$1.39 billion, and pro forma EBITDA of $1.02 a share, from $1.07. For 2002, it projects
$1.47 billion in sales, from $1.53 billion, and pro forma EBITDA of $1.27 a share, from
$1.33. Its 12-month target price of $79 is derived from a sum-of-the-parts valuation. On
May 15, the shares closed at $33.85. |
