BANCBOSTON ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
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January 15, 1999
The Web Report ˆ Volume 2, Issue #2
FINALLY - A BREAK ˆ Overall market weakness appears to have pushed back
the Web group, despite a strong report from Yahoo! Of course, like
Amazon, Yahoo! did not seem to beat very high expectations.
This week, as of January 13, 1999, Internet.com‚s ISDEX index closed at
339.83, up 10.8% from the end of last week and up approximately 236.2%
over the same period last year. For comparison, the NASDAQ ended the
week down 2.1% over last week, but up 47% from the same date last year.
WHAT CAN CONTINUE TO PUSH AND KEEP THESE STOCKS DOWN? ˆ We are watching
three factors. First, traumatic external factors related to economic
weakness would cause these stocks to be sold first, in our view.
Second, as indicated above, two of the monsters have already reported
with mixed reactions. With the exception of AOL and eBay, we believe
most of the remaining companies are not positioned for growth
dramatically higher than estimates. Third, we expect a rush of new
stock from IPOs and secondary offerings may satiate demand by the end of
the quarter.
ONLY 2 MONSTERS LEFT TO REPORT ˆ AOL and eBay ˆ Among the monsters left
to report, we expect AOL to achieve record results, a task made more
difficult by AOL‚s relatively larger base of revenues and earnings.
eBay will be comparing against smaller numbers, but we expect the
absolute magnitude of business to surprise those doubting the auction
opportunity.
STOCK STRATEGY: We continue to suggest building and holding a portfolio
of the biggest and best, focusing on AOL and Amazon, and a select number
of emerging franchises, with a more opportunistic trading approach.
With Yahoo! we have less confidence regarding its ability to grow into
its valuation as it strives to transitions from portal to network. We
continue to look for opportunity among those stocks that are just
beginning to recover or have not recovered as much as the group since
the summer and have potential for positive surprises in the December and
March quarters. Companies on this list include CNET, E*Trade, Excite,
Preview Travel, SportsLine, and Ticketmaster/Citysearch. E*Trade has
already reported strong results and Ticketmaster has just announced
impressive revenue growth.
E*TRADE: This week, E*Trade reported fiscal Q1:99 revenues of $88.1M
and EPS of ($0.23), significantly above our estimates of $66.1M and
($0.33). The company added 132,000 new accounts in the quarter, ending
with 676,000 accounts. Average daily trades for Q1 were up 41% from the
previous quarter. E*Trade‚s average share of aggregate retail and
institutional trading volumes in Q1 grew to an approximate 1.55% share
of equities (up from 1.24% in the previous quarter) and to 2.23% in
options (up from 1.90%). For reference, on-line trading in general
represented 27% of all equity trading in the December quarter.
Since the launch of Destination E*Trade in September, approximately
500,000 visitors have become registered members to receive free
financial research and management tools. So far, we estimate small, but
encouraging rates of conversion from registered members into full
E*Trade customers.
We expect E*Trade‚s aggressive marketing campaign to pay off over the
long term as illustrated by our EPS increases in F2000 to $0.55 from
$0.50, and F2001 to $1.20 from $1.00. If the marketing campaign is
successful, E*Trade‚s cost structure is more attractive than its
off-line competitors, suggesting prospects for a relatively high-margin
business. We believe EPS upside is possible from many sources including
international licensing/joint ventures, advertising, and fees from other
services. For example, E*Trade announced a minority investment with an
option to buy 51% of the newly formed E-offering, which is proposing to
offer investment banking services at lower prices based on a lower cost
structure enabled by the Web. We believe the on-line market and the
company are building momentum.
YAHOO!: Yahoo! reported 4Q revenues of $76.4M, above our estimate of
$65.0M. The company reported EPS before charges of $0.21, compared to
our estimate of $0.16. Traffic increased more than 15% sequentially,
which we view as being at the low end of expectations. A stronger sign,
in our view is the 10M jump to more than 35M unique registered users.
Although results were above our estimates, we believe they were below
some investors‚ expectations. While the stock weakened a bit with the
rest of the market, we believe the two-for-one stock split, announced
earlier this week, created enough retail interest to mitigate a down
tick.
While Yahoo!‚s service remains easy to use and habit-forming, we are a
bit concerned that its content, commerce, and community offerings are
somewhat thin, relative to other networks and e-tailers. As such,
Yahoo! remains more of a portal than a network, in our view. Yahoo!
must also adapt to changing commerce trends. We are observing that more
people are using the Web to find information to help make purchase
decisions. While Yahoo!‚s directory and search functions provide such
information, it is not by its nature as selective as an AOL or Amazon.
At AOL, high rents have screened out many weaker stores, leaving those
e-tailers with the best brands and strongest services. We believe
consumers care more about fulfillment than price, returning to the store
that fills an order first. Yahoo!‚s store is more of a mechanism to
search for price, potentially leaving consumers with an inferior
service. We believe consumers will want the same convenience of
one-stop shopping as in a mall. While Yahoo! has one-time registration
for credit card and shipping information, this may not be enough. We
expect consumers will prefer shipment from a central source, not
multiple stores within Yahoo!. In our view, Amazon is better positioned
with an attractive brand and focus on inventory management for key
categories.
Given the challenge to grow into the valuation, we would be tending to
take some profit, although we would keep some participation in the name,
as we remain willing to give the company the benefit of the doubt given
its great track record. We would be particularly encouraged if the
company were aggressive in using its stock for acquisitions, although we
believe there may be hesitation to change the business model. Still, we
would prefer to own AOL, where we find it easier to justify valuation
and where we see opportunities to gain share from Yahoo! with AOL.com.
Yahoo!‚s market capitalization of $40B is still just over half of AOL‚s
market capitalization of almost $75B.
AOL: AOL announced a broadband deal with Bell Atlantic this week, under
which the two companies will market a DSL service offering to consumers
in Bell Atlantic‚s service areas. Bell Atlantic will provide the
high-speed connectivity and AOL will provide the content. AOL will bill
the customer and pay a fee to Bell Atlantic. The service is expected to
cost consumers around $40 per month for unlimited access, which we find
consistent with most cable broadband consumer offerings, as compared
with standard AOL dial-up service for $21.95 per month for unlimited
access.
Financial terms weren‚t disclosed, but we believe that the economics for
AOL will be at least as good as the Œbring-your-own access‚ plan,
implying $10 per member per month that only needs to cover marketing and
other operating expenses, leaving the rest to fall to the bottom line.
We believe $10 is the floor, with the potential for more depending on
the volume of subscribers AOL brings to the deal. The structure of the
deal should be similar to AOL‚s relationship with Worldcom, where AOL
outsources access and focuses on content.
Bell Atlantic plans to roll out the DSL service rapidly, passing 7.5M
homes by the end of 1999 and 14M by the end of 2000. We are surprised
by the size of this commitment from Bell Atlantic, and believe it bodes
well for the success of the rollout. We believe this is the first of
several broadband deals to be announced, with other DSL and cable
agreements on the near-term horizon.
This and future broadband deals allow AOL to offer members a better
service, with more revenue per member, while keeping the cost per member
fixed relative to usage, unlike the current model where AOL‚s cost of
services varies directly with minutes of usage per member. While we are
leaving our estimates unchanged, we expect broadband deals in general
will aid in member growth while improving the company‚s business model
by increasing gross margins.
Regarding AOL‚s core business, we believe the December-quarter, to be
reported on January 27, will be the strongest in AOL‚s history across
all metrics. If we had to own just one Internet stock, it would continue
to be AOL. We believe this is the first of several broadband deals to
be announced over the next year, providing a steady flow of news to help
investors gain confidence that the business can grow into the stock‚s
valuation.
TMCS: TicketMaster Online-CitySearch announced plans to buy
CityAuction, a local online auction site. CityAuction has approximately
47,000 registered users and receives approximately 100,000 page views
per day. We view this acquisition as significant in that it allows TMCS
to extend its local offerings to include local auctions. Selling
tickets online was the first of many expected commerce initiatives for
CitySearch, and we believe CityAuction marks another step towards
CitySearch‚s goal of becoming the definitive source for local Web
content and activity.
Leveraging CitySearch‚s large local audience, City Auction may have a
competitive jump on eBay, which has not yet provided localized service.
For example, if you were to buy a heavy item, such as a couch or big
screen television set, it would make much more sense to buy it locally,
in order to avoid significant shipping expenses. In addition, if you
decide to purchase something expensive, such as a car, we believe you
would want to be able to see the item and maybe even test drive it
before making a final decision.
CitySearch also pre-announced revenues of $13.6M, compared to our
estimate of $9.4M, with most of the upside coming from higher ad sales
and a faster shift of ticket sales to the Web, with overall ticket sales
being helped by the Rolling Stones tour and other events. In addition,
we believe the reinstatement of the NBA season should help TMCS due to
the fact that TicketMaster is the exclusive ticket sale provider for
several of the teams.
We believe CitySearch has moved to the top tier of Web stocks, based on
the recognition of its leadership position in local Web offerings. We
believe the market opportunity as measured by newspaper valuations
ranging from $4B to $20B is large enough to justify the company‚s market
capitalization.
E-Tailing Update ˆ lauren_cooks_levitan@rsco.com
CONSOLIDATION AND CATCH-UP - Reporting season for the e-tailing group
begins next week with Preview Travel expected to report on the 21st. We
believe holiday season results will come close enough to inflated
expectations to confirm the strength of e-commerce. We believe the
primary 1999 primary e-tailing story will be consolidation and playing
catch up. We expect more mergers in competitive categories, such as that
of CDNow and N2K. In the off-line world, everybody is racing to gain
e-commerce capabilities. Compaq announced this week that it is
purchasing Shopping.com for $220M, or $19 a share, a 44% premium to
Shopping.com‚s closing price Friday of $13.1875. The lure is both
Shopping.com‚s technology and Web site, which should allow for Compaq‚s
AltaVista Internet guide to directly complete electronic commerce
transactions and to funnel traffic to the e-tailing destination site.
Many brick-and-mortar retailers are only now truly embracing the medium.
This week Sunglass Hut bought Shades.com and GNC beefed up their online
efforts, a signal that traditional retailers are taking the e-tail
channel seriously.
PREVIEW‚S STRATEGY WORKING - We continue to recommend purchase of
Preview Travel shares in advance of what we expect to be positive news
about the company‚s future prospects. We have warned that Q4 results
could be mixed and that transaction revenue could be slightly lower than
our estimate of $3.5M due to seasonal trends, but expect higher
advertising revenues and slightly lower expenses should allow the
company to meet our bottom-line estimate of an operating loss of $0.59.
Despite this concern, we believe next week‚s conference call should
signal that post-Christmas business trends have been robust, with the
company benefiting from its recently enhanced Web site, a seasonal
uptick in travel business, solid response to the company‚s radio
advertising campaign, and a Christmas season where we believe consumer
comfort with shopping online increased. We continue to believe that
Preview‚s current market capitalization of $316.1M appears attractive
relative to the cost of replacing the technology, content, and customer
service infrastructure. In addition, we believe the company‚s
initiatives to increase its look-to-book ratio could result in good news
and upside to our estimates in Q1.
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 $221.1B.
This compares to the top 20 media companies, which have a combined
market capitalization of approximately $440.4B. In the retail category,
Wal-Mart‚s market capitalization is approximately $177.3B.
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Rating 1/14 1/7 1-Wk 52-Wk Chg
Chg High 52Wk Hi
1/14- to 1/14
1/7 Price
Amazon AMZN BUY 138 158 7/8 -13% $199 1/8 -30.7%
Am.Online AOL SBUY 144 1/2 147 7/8 -2% $167 -13.5%
CMG CMGI LTA 105 170 1/4 -38% $155 -32.3%
CNET CNET BUY 72 3/4 56 30% $81 -10.2%
Dig.River DRIV BUY 40 50 1/4 -20% $61 3/8 -34.8%
Dialog DIALY MP 6 4 47% $16 1/4 -63.3%
Dbl.Click DCLK MP 84 1/2 58 46% $114 5/8 -26.3%
Ebay EBAY BUY 225 1/3 298 -24% $321 -29.8%
E*Trade EGRP BUY 85 3/4 64 34% $108 -20.6%
Excite XCIT BUY 65 1/8 55 1/3 18% $95 -31.4%
Gemstar GMSTF BUY 61 1/4 64 5/8 -5% $69 5/8 -12.0%
Getty GETY BUY 19 1/2 17 15% $28 1/4 -31.0%
Lycos LCOS BUY 85 3/4 71 1/2 20% $145 3/8 -41.0%
NetGravity NETG BUY 20 2/3 15 4/9 34% $32 1/2 -36.3%
Net.Sol. NSOL BUY 165 216 1/2 -24% $260 3/8 -36.6%
NewsEdge NEWZ MP 13 3/8 10 2/3 25% $19 3/4 -32.3%
N2K NTKI MP 15 1/4 13 4/5 10% $34 5/8 -56.0%
Onsale ONSL BUY 49 4/7 53 4/5 -8% $108 -54.1%
Prv.Travel PTVL BUY 23 4/9 19 3/8 21% $44 -46.7%
Infoseek SEEK MP 73 52 7/8 38% $100 -27.0%
SportsLine
USA SPLN BUY 28 1/4 19 5/8 44% $39 5/8 -28.7%
TiketMaster Online
CitySearch TMCS BUY 62 53 1/4 16% $80 1/2 -23.0%
Yahoo! YHOO BUY 344 320 7% $445 -22.7%
Internet Stock
Index ISDEX 339.83 306.66 10.8% N/A 245.6% (1)
NASDAQ Composite
Index COMQ 2276.82 2326.09 -2.1% N/A 45.5% (1)
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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 ˆ 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 ˆ 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 ˆ Rating for a stock, which we believe could have
long-term value, however we would not necessarily recommend buying.
Market Performer ˆ 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, Ticketmaster/CitySearch,
and Yahoo! and has been a managing or comanaging underwriter for or has
privately placed securities of Digital River, Ebay, Inc., E*Trade,
Excite, Onsale, SportsLine USA and Ticketmaster/CitySearch 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 Thursday, January 14, 1999.
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
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. BancBoston
Robertson Stephens International Ltd. is regulated by the Securities and
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Copyright * 1999 BancBoston Robertson Stephens Inc. |
