BANCBOSTON ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
mailto:keith@rsco.com
December 30, 1998
The Web Report #53 HAPPY NEW YEAR!
This week, Internet.com's ISDEX index closed at 287.59, down 6.1% from
the end of last week and up approximately 192.5% over the same period
last year. For comparison, the NASDAQ ended the week down 0.3% over
last week and up 38.5% from the same date last year.
LOOKING BACK AT 1998: As we get ready for the New Year, we are very
thankful, as we reflect on the past year among the Internet stocks. We
can't help but be somewhat stunned.
The biggest percentage winner has been Amazon.com's stock, which has
grown 966% since January 1st, 1998. We believe the stock's upcoming 3
for 1 split may only magnify the demand for shares. The next biggest
gain has been in Network Solution's stock, which is up 800% year to
date. Other winning stocks for the year, ranked in order, are CMGI up
639%, YHOO up 606%, AOL up 552%, EBAY up 434%, DRIV up 375%, SEEK up
365%, XCIT up 198%, LCOS up 158%, ONSL up 144%, GMSTF up 132%, PTVL up
128%, EGRP up 121%, CNET up 73%, NETG up 64%, SPLN up 53% and DCLK up
27%. Even growth at the low end of this group is impressive.
Despite the remarkable recognition, all of the stocks in our universe
ended the year below their 52-week highs, except AOL.
LOOKING TO Q1:99: We have been very lucky with the sharp and sustained
rally among Internet stocks. As we look to quarterly reporting season,
which officially starts January 12th with Yahoo!, we expect to see some
near-term peaks in these stocks. We expect investors may pause after
looking toward flattish sequential comparisons with the March quarter
with the December quarter. We expected a mixed reaction among the
stocks, with leaders holding, some emerging stock rising and laggards
falling. With the leaders, AOL, Yahoo!, Amazon, and eBay, we expect the
numbers to almost catch up with the stocks, based on expectations of big
percentage positive surprises.
Some stocks have seen perception changes regarding competitive positions
and market conditions that can more than justify recent moves, in our
view. Network Solutions is emerging as a leader in a big market
segment, with potentially significant positive surprises. E*Trade has
been benefiting from rapid trading volume rates among the stocks.
Digital River is defining a new market segment for e-delivery of
software. Ticketmaster/Citysearch is leading the local content/commerce
market.
A few stocks have languished and could make or beat numbers a bit and
perform better, including CNET and Excite. Other companies moving past
competitive challenges may not surprise until Q1, but the stocks could
sneak up on us, including SportsLine, Preview Travel, and Getty Images.
We are concerned about some stocks that have followed the pack and may
not deliver enough to keep the stocks at current levels. Among those
stocks we would include Onsale, N2K (CDNow) and many of the smaller
e-tailers, particularly some of the off-line retailers with news
releases about on-line efforts and minimal revenues.
E*TRADE: We were surprised by the major movement this week in the
online brokerage segment. E*Trade's stock, in particular, ended the week
up 14% over last week. We believe this growth reflects recent optimism
about the online brokerage market overall, which may help accelerate the
impact of E*Trade's aggressive marketing campaign.
Schwab remains a solid competitor. Schwab's stock closed yesterday at
$56 3/8, giving the company a market capitalization $22.6 billion,
compared to Merrill Lynch's market cap of $25.9 billion. For reference,
E*Trade's comparable market cap was $2.9 billion.
The challenge for E*Trade is to gain market share relative to these and
other offline leaders. Merrill has more than 9 million clients, with
assets per account of almost $150,000 and a market cap per account of
almost $2,900. Schwab has approximately 5.5 million accounts, with
assets per account of $75,000 and a market cap per account of
approximately $4,100. Meanwhile, E*Trade has over 540,000 accounts,
assets per account of just over $20,000 and a market cap per account of
over $5,300. This seems to leave considerable opportunity.
To build its business, E*Trade is spending $100 million on marketing.
On Monday, E*Trade launched the second phase of its national advertising
campaign. If the company meets its goal of adding one million accounts,
we believe this would seem reasonable. For reference, the company ended
the September quarter with approximately 400,000 active accounts
(excluding OptionsLink accounts). We estimate E*Trade will add 70,000
new accounts this quarter, ending December with approximately 470,000
active accounts. Using our December quarter estimate of $45.6 million
for marketing and spending, this translates into an approximate $650
cost per new account. This estimate is unfair as it includes costs not
directly associated with adding new accounts. It is also misleading
because spending in one quarter impacts the next quarter. For example,
E*Trade frequently offers free trial periods, suggesting costs in one
quarter would not result in additions until the next quarter. We
believe the average cost is much lower if looked at over a year's time.
One could justify as much as $400 to acquire a new account, in our
view. Based on our estimates, each account brings in approximately $400
in annual revenue, and $200 in incremental annual gross profit, based on
a gross margin assumption of 50%. A one or two year payback appears to
be a fair return on a marketing investment, in our view. Further, we
believe the costs to acquire accounts will only increase over time,
suggesting it makes sense to be aggressive now.
We believe account growth could be helped by the conversion of
Destination E*Trade users to fee-generating accounts. We were
encouraged by this week's announcement that E*Trade has registered
500,000 users for the free Destination E*Trade information service,
since its launch in September. E*Trade continues to add content, which
we believe will be a key to the competitive race. For example,
yesterday E*Trade announced a marketing agreement with CNNfn.com.
On a relative basis, E*Trade's cost structure is more attractive than
its off-line competitors, assuming the marketing is successful. We
estimate EPS of $0.50 in F2000 and $1.00 in F2001. We believe EPS
upside is possible from many sources including international
licensing/joint ventures, advertising, and fees from other services.
We expect the December quarter results will give us a hint at E*Trade's
overall momentum, but that we may have to wait until the March or even
June quarters to really see a big jump in account growth. The company
still faces a tough competitive battle, in our view. Schwab appears to
be defending itself well, with over 2 million online accounts, however
Merrill seems to be late to the game, recently announcing delays in
plans to offer online trading due to technology problems. E*Trade
remains the technology leader, in our view. In sum, the market
opportunity for the company to gain market share is large enough for us
to remain optimistic on E*Trade and its stock.
E-Tailing Update - lauren_cooks_levitan@rsco.com
HOLIDAY SHOPPING RESULTS: Based on preliminary indications, it looks
like Christmas 1998 was merry for leading companies. In the physical
world, it appears that much of the sales came even closer to Christmas
than in the past, with substantial promotions in many cases potentially
hurting profitability. For e-tailers, we believe holiday shopping
significantly surpassed our estimates, if not our expectations.
Recent survey data suggests big numbers. InterPublic Group estimates
that online sales for this holiday season would reach $5 billion, or
four times total Internet sales between Thanksgiving and Christmas last
year. The Boston Consulting Group and Shop.org, said that holiday sales
were up 230% over last year, with apparel sales being particularly
strong, growing to $300 million, from under $100 million in 1997. In
addition, the average order was $55, up 6% over last year's average.
Shoppers appear much more comfortable trying on-line stores. AOL, at
any given point in time, approximately 20% of shoppers were there for
the first time. To put these revenue estimates in perspective, Street
estimates for Wal-Mart's Q4 revenues are approximately $40 billion.
Even with huge expectations surrounding Q4 already built into stock
valuations, we still don't underestimate the potential impact of
positive news fueling retail investor enthusiasm. We may even get some
news next Thursday, when most bricks-and-mortar retailers will report
their December sales results. Many of them may give some indication of
how new, hybrid Internet businesses fared during December. With big
percentage increases likely to be reported when compared to last year's
minimal efforts, we wouldn't be surprised if the both the hybrids and
the pure e-tailers were again the beneficiary of some of this positive
news. Still, we expect even the leading stocks to pause and the
laggards to drop when investors face the prospect of e-tailers starting
to warn about flat to slightly declining sequential sales growth in Q1
following the anticipated huge seasonal increases of Q4.
THE BIG PICTURE - The Internet companies appear to be taking mind share
and revenues from existing media and commerce companies, while creating
some additional value through efficiency of the Web. Thus, 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 50 companies in
Internet.com's ISDEX index (excluding Cisco) is approximately $188.7
billion. This compares to the top 20 media companies, which have a
combined market capitalization of approximately $419 billion. In the
retail category, Wal-Mart's market capitalization is approximately
$178.6 billion.
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Rating 12/30 12/23 1-Wk 52-Wk Chg
Chg High 52Wk Hi
12/30- to 12/30
12/23 Price
Amazon AMZN BUY 321 1/4 325 -1% $361 7/8 -11.2%
Am.Online AOL SBUY 147 1/2 138 7% $159 * -7.7%
CMG CMGI LTA 111 3/4 123 1/3 -9% $135 * -17.5%
CNET CNWK BUY 51 1/8 56 3/8 -9% $74 * -31.4%
Dig.River DRIV BUY 35 38 -8% $44 -20.5%
Dialog DIALY MP 5 3 1/3 50% $16 * -69.2%
Dbl.Click DCLK MP 44 3/4 48 1/4 -7% $77 1/8 -42.0%
Ebay EBAY BUY 252 7/8 298 -15% $311 * -18.8%
E*Trade EGRP BUY 50 4/5 44 3/4 14% $65 -21.8%
Excite XCIT BUY 44 2/3 49 2/3 -10% $58 5/8 -23.8%
Gemstar GMSFT BUY 56 5/8 56 1/3 1% $69 1/6 -18.1%
Getty GETY BUY 18 14 1/4 26% $28 * -36.3%
Lycos LCOS BUY 53 3/8 63 3/4 -16% $68 * -22.4%
NetGravity NETG BUY 16 17 1/2 -9% $32 * -50.8%
Net.Sol. NSOL BUY 118 1/8 141 3/4 -17% $172 1/4 -31.4%
NewsEdge NEWZ MP 11 1/8 7 4/7 47% $19 * -43.7%
N2K NTKI MP 14 18 1/4 -24% $34 5/8 -59.7%
Onsale ONSL BUY 44 63 1/2 -31% $108 -59.3%
Prv.Travel PTVL BUY 17 1/4 19 1/4 -10% $44 -60.8%
Infoseek SEEK MP 50 49 4/9 1% $56 4/5 -12.1%
Sports.USA SPLN BUY 16 1/2 17 -3% $39 5/8 -58.4%
TiketMaster
Online
CitySearch TMCS BUY 60 1/4 80 1/2 -25% $80 * -25.2%
Yahoo! YHOO BUY 244 5/8 250 -2% $286 -14.5%
Internet.com's Index
ISDEX 287.59 306.23 -6.1% N/A 192.5%(1)
NASDAQ Composite Index
COMQ 2166.95 2172.54 -0.3% N/A 38.5%(1)
To improve the alignment of the table:
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(1) Change based on last 12-month's performance.
Source: AT Financial Information and BRS Estimates
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. 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.
BancBoston Robertson Stephens maintains a market in the shares of
Amazon.com, CMG Information Services, CNET, Dialog, Digital River,
DoubleClick, Ebay, Inc., E*Trade, Excite, Gemstar, Getty, Infoseek,
Lycos, Microsoft, NetGravity, Netscape, Network Solutions, NewsEdge,
N2K, Onsale, Preview Travel, SportsLine USA, Yahoo! and has been a
managing or comanaging underwriter for or has privately placed
securities of Digital River, Ebay, Inc., E*Trade, Excite, Onsale, and
SportsLine USA within the past three years.
FOR ADDITIONAL INFORMATION, PLEASE CALL YOUR BANCBOSTON ROBERTSON
STEPHENS REPRESENTATIVE AT (415) 781-9700.
Unless otherwise noted, prices are as of Wednesday, December 23, 1998. |
