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BANCAMERICA ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
keith_benjamin@rsco.com <mailto:keith_benjamin@rsco.com>
July 10, 1998
The Web Report #28
We believe that it has been easy to be distracted by the volatility of the
Web stocks over the last few weeks and perceive that all Internet stocks
must be overvalued. Yahoo! reported a solid set of numbers, generally at
the high end of expectations. As discussed below, we think its stock has
already fully reflected this news. Most stocks in the group have not run as
far, with most just recovering back to highs reached around when Yahoo!
reported last quarter. We believe there is still room for upside when
companies like CNET report solid quarters, by our estimate.
Last quarter, most of the Internet stocks followed the lead from Yahoo!
which kicked off the reporting season with impressive traffic and
advertising numbers. Most other reports were not as strong, in our view.
For reference, the ISDEX reached its all-time high at the end of April.
Then the index dropped 22% from $165.38 as of April 30th to $129.61 on June
15th, before returning to $162.45 as of the close yesterday. We believe we
will see a similar drop in these Internet stocks as we begin to hear Q2
results.
Again, it is easy to get lost in the averages. For clarification, we have
split the stocks under our coverage into three categories: companies that
deserve high valuations, companies that probably deserve high valuations,
and companies that might not deserve high valuations.
The Deserves: We believe there are several companies, which have
established themselves as franchise Internet brands. These include America
Online, Yahoo!, and Amazon, whose stocks appear to boast big brand names
that we believe can demonstrate reasonably dramatic earnings leverage long
term from incremental audience, advertising and commerce growth.
While we believe AOL's stock is within a reasonable price range, we worry
that Yahoo! and Amazon have gotten ahead of themselves. We would not be
surprised to see a correction in these two stocks near-term. While Yahoo!'s
recently reported Q2 earnings were at the high end of our expectations, we
do not believe the results alone will be enough to move the stock higher,
after the 70% climb of the last month. After reporting last quarter's
results when the stock was at $97 1/4 per share, Yahoo!'s stock climbed as
much as 27.5% in the month following the report, and fell back down to $102
per share in the subsequent month. We believe this time around the stock
already reflects the upside, which could be attributed to the quarter's
results. Given expectations of further positive EPS surprises for the next
few quarters and beyond, we believe YHOO will end the year up higher than
its current levels, however we believe the stock is ready to take a break
here.
The Probably Deserves: The next level of stocks are companies where
investors appear to be debating competitive positions, business models and
stock valuations. We see the most room for positive surprises on June
quarter reports, which we believe could help these stocks. Among our
favorites in this group are SportsLine and C/Net.
We believe the major catalyst for SportsLine's stock will be the fall
football season, at which time we expect to see significant SportsLine
promotion during NFL games through the company' CBS relationship. In the
meanwhile, we also expect the stock could move upon positive news regarding
the company's renewal of its AOL contract, which expires in September,
and/or new distribution contracts.
CNET is probably our strongest near-term recommendation. We believe CNET's
competitive and profitability position now ranks near the top of the
Internet stock list. We believe the company will have even more leverage
when it begins charging listing fees on COMPUTERS.COM and SHOPPERS.COM,
which we believe could equal current advertising revenues over the next
year, suggesting considerable upside to our estimates. We believe NBC will
provide considerable promotional push behind Snap!. Television commercials
will start in mid-July, with a major integrated campaign slated for
September. As investors have more visibility on CNET's ability to generate
commerce revenues and to demonstrate potential earnings leverage, we believe
it could allow us to raise our estimates and price target beyond our current
target of $62.
Another favorite in this tier of stocks is Getty Images. We believe Getty
appears to be overlooked by both institutional and retail investors, more
because of stock-related issues than fundamentals. It has a solid,
defensible and growing analog image business that is being accelerated by
digital delivery. Our confidence level remains high for the quarter. We
believe the stock could quickly reach our $40 price expectation, which is
based on a multiple of 27.5 times $1.45 F1999 EBITDA per share.
Our other BUY-rated stocks include Preview Travel, Excite, E*Trade, and
NewsEdge. We would expect these stocks will benefit from numbers news this
quarter and next. We believe these stocks deserve higher valuations, but
still need to prove it to others for their stocks to work.
The Might Not Deserves: There are several stocks that have moved sharply
with the group on news items that we do not believe necessarily justify
higher valuations. Netscape's jump after news of potential partnerships
with media companies does not push us to view the company as deserving a
Yahoo!-like valuation. Still, we would prefer to follow our mother's advice
of not saying anything if we don't have nice things to mention. In fact,
some of these companies have reasonably good prospects, in our view.
However, we believe it is important to grow more selective on holdings in
the group as these stocks move wildly. For example, we continue to remain
concerned about competition and business model viability in the music space.
We would favor Amazon.com's prospects over N2K's, and remain concerned about
N2K's stock.
Yahoo!'s Valuation
Why do we still have a BUY on Yahoo! when our price target is $127.50? This
is based on a 50 multiple of our 2001 EPS estimate of $2.55. We view this
as more of a valuation benchmark. Because we expect further positive EPS
surprises for the next few quarters and beyond, we believe it will be able
to earn enough money over time to justify a high price than even $200.
However, we would not be surprised if the stock fell 10%-20% short-term.
Our strategy regarding ratings is not to change back and forth for moves
that we expect will be sharp and short.
How much upside is there to our Yahoo! estimates? Generally, Yahoo!, is a
leader, capturing a disproportionate share of advertising and commerce
revenues. For reference, we estimate that Yahoo!'s advertising and commerce
revenues in 2001 will approach $600 million, which we project represents
less than 10% of its potential market, which is reviewed below. We are
assuming Yahoo! essentially maintains audience share and reaches some 100
million people out of our 2001 estimate of 160 million people worldwide.
Generally, we expect more revenues per Yahoo! member than our 2001
assumption of almost $5 per person visiting the network. We believe there
could be considerable upside to this number. Marketing costs remain a
variable, but the beauty of the model is that incremental margins are
extraordinarily high, suggesting substantial EPS leverage.
We estimate just U.S. advertising revenues will be over $6 billion in 2001
and commerce payments will exceed $1.3 billion. Over and above that are the
commerce payments from e-tailers to networks. We estimate the portal sites,
including AOL, CNWK, YHOO, XCIT, SEEK and LCOS have been able to secure more
than $1 billion in commerce contracts for the 3-year period, beginning in
1997. We estimate other portal areas, such as Netscape and Microsoft, and
community areas, such as GeoCities, to be at least another $450 million, for
a combined total of $1.5 billion. This represents approximately 7.3% of our
total e-tailing estimate of $20.5 billion for the same 3-year timeframe.
Assuming this percentage remains constant each year, we estimate the amount
of e-tailing revenue portal sites could record in 1998 alone is
approximately $505 million, growing to more than $1.3 billion by the end of
2001.
THE BIG PICTURE
We believe the long-term opportunity in the group is still significant as
audience time and advertising/commerce revenues shift from traditional media
to the Web. For quick reference, the market capitalization of the 50
companies in the ISDEX index is currently around $82.3 billion, down from
$84 billion last week. This compares to the top 10 media companies, which
have a combined market capitalization of $297 billion, which decreased from
$306 billion a week ago.
With total trailing sales of almost $7.6 billion for the ISDEX companies,
its market capitalization to revenue ratio is now 10.8 times. AOL
represents about $24.5 billion of that total. With 1998 revenues projected
at $2.6 billion, AOL is selling at 9.4 times revenues. If we compare this
to the major media companies, AOL's market capitalization would rank below
Disney (DIS $111) at $75.4 billion, Time Warner (TWX $86 11/16) at $49.0
billion, News Corp. (NWS $32 1/4) at $32.2 billion, and above CBS (CBS $33
9/16) at $24.1 billion, MediaOne Group (UMG $44 9/16) at $27.1 billion,
Viacom (VIA $61 15/16) at $22.1 billion, TCI (TCOMA $39 3/8) at $20.6
billion, Clear Channel Communications (CCU $115 1/2) at $14.3 billion, and
Chancellor Media (AMFM $52 3/8) at $7.4 billion. The total market cap for
these 10 companies is around $296.7 billion, compared to total trailing
12-month revenues of about $86 billion, for a multiple of almost 3.5 times.
We wonder if the total ISDEX market capitalization is the right number long
term, with fewer than 50 companies surviving or remaining independent. Our
Buy ratings remain based on our view of improving fundamentals. In fact,
news and data supporting the underlying Web drivers appears robust.
If the table below is difficult to read in your mail browser please refer to
the attached word document or go to the website at
internetstocks.com <http://www.internetstocks.com> .
1-Week
% Change
7/2/98 Price
to 7/9/98
52-Week Price
Rating 7/9/98 7/2/98 Price
High Target
Amazon AMZN BUY $105 1/2 $110 1/3 -4% $143 3/4 $45
America Online AOL SBUY $113 7/8 $124 -8%
$115 $85
Cendant CD LTA $22 1/5 $21 4/7 3% $41
2/3 $30(1)
CNET CNWK BUY $56 1/2 $68 1/2 -18% $71
1/4 $65
E*Trade EGRP BUY $25 4/7 $22 1/2 14% $47 7/8
$45(2)
Excite XCIT BUY $82 1/4 $99 -17% $111
$95
Getty GETY SBUY $24 3/8 $25 3/4 -5%
$28 1/4 $40
Lycos LCOS LTA $71 $79 -10% $107
1/4 $75
MemberWorks MBRS SBUY $34 1/8 $33 3%
$35 1/2 $50
NewsEdge NEWZ BUY $ 9 1/8 $ 9 1/4 -1% $19
3/4 $30
N2K NTKI LTA $20 3/8 $20 2%
$34 5/8 $25
Onsale ONSL BUY $23 3/8 $25 5/8 -9% $36
4/5 $45
Preview Travel PTVL BUY $34 1/2 $39 3/4 -13% $44
$45
Infoseek SEEK LTA $32 4/9 $37 1/2 -14% $45
$30
SportsLine USA SPLN SBUY $33 1/4 $36 3/8 -9% $39
5/8 $60
Yahoo! YHOO BUY $184 $172 7/8 6%
$207 1/2 $128
Internet Stock Index
ISDEX $ 162.45 $ 165.31 -2% N/A
N/A
NASDAQ Composite Index
COMP $1939.82 $1894. 2%
$2645.72 N/A
(1) Based on a 20 multiple on 2001 earnings
(2) Based on a 30 multiple
Source: FactSet
BancAmerica Robertson Stephens maintains a market in the shares of
Amazon.com, CNET, Chancellor Media, E*Trade, Infoseek, Lycos, MemberWorks,
Microsoft, N2K, NewsEdge, OnSale, Preview Travel, SportsLine USA, and Yahoo!
and has been a managing or comanaging underwriter for or has privately
placed securities of C/NET, E*Trade, MemberWorks, OnSale, Preview Travel,
SportsLine USA.
FOR ADDITIONAL INFORMATION CALL YOUR BANCAMERICA 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 the
Firm, the information upon which such opinions and estimates are based is
not necessarily updated on a regular basis; when they are, 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. The Company's 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."
BancAmerica Robertson Stephens from time to time performs corporate finance
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. Facts
and other information discussed have been obtained from sources considered
reliable but are not guaranteed. BancAmerica 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. BA Robertson Stephens
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The securities discussed herein are not FDIC insured, are not deposits or
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investment risk, including possible loss of any principal amount invested.
Copyright * 1998 BancAmerica Robertson Stephens
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