01:52am EST 12-Mar-99 BancBoston Robertson Stephens (Benjamin, Keith 415-693-3
KBWK: The Web Report - Volume 2, Issue #10 (Page 1 of 2)
BANCBOSTON ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
Keith@rsco.com
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March 12, 1999
The Web Report -- Volume 2, Issue #10
This week, the NETDEX index closed at 807.87, up 14.4% from last week and up
approximately 514.1% over the same period last year. The NETDEX has finally
recovered to a new high, after falling from its previous high of 806.3 in
January. For comparison, the NASDAQ ended the week up 5.2% from last week, and
up 37.4% from the same date last year.
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 67 companies in the NETDEX index is
approximately $300.7 billion. This compares to the top 20 media companies,
which have a combined market capitalization of approximately $500.6 billion. In
the retail category, Wal-Mart's market capitalization is approximately $211.9
billion.
THE BIG NETWORKS KEEP GIVING US REASONS TO CARE - We were encouraged this
week by broadband news from AOL, more efforts to push the value of Lycos, and
further product direction from Amazon. Confusion surrounding the Lycos
combination and competitive concerns for Amazon continue to present investment
opportunities now, in our view.
AOL CONTINUES BROADBAND ROLLOUT - AOL announced a deal with SBC
Communications to offer high-speed DSL access to the AOL service for customers
in the Pacific Bell, Southwestern Bell, and Nevada Bell regions. Today, SBC
makes DSL service available to 2 million homes, with plans to be available to
8.4 million homes out of 11 million by the end of 1999. Including the Bell
Atlantic deal, AOL can now offer broadband service to subscribers in 21 states.
We believe this puts AOL in a position to have an initial nation-wide broadband
footprint with one or two more deals. We still expect AOL to sign some cable
deals in 1999, given its strong hold on its customers and competitive pressure
from these partner telephone companies. Until then, we believe DSL offerings
will meet with equal or greater success compared with cable. The key limiting
factor in our view is that both services require a technician to visit the
consumer's home, do some re-wiring, and open the user's PC to install some
hardware and software. The processes for cable and DSL are slightly different
and equally arduous, but are expected to get easier with greater modem
availability. The cost to the consumer is roughly the same ($40 per month or
so), and the access speeds end up being similar. Even though cable starts out
at around 1.5 mbps, over twice as fast as the 620 kbps expected with DSL, it
can degrade to roughly half that, as more users are added. As AOL pursues
negotiating and lobbying efforts to reach agreeable terms with cable operators,
we believe DSL makes sense as an interim and long-term solution. Regarding
AOL's core business, we believe the March quarter will be one of the strongest
in AOL's history across all metrics.
LYCOS: CAN CMGI FIND A HIGHER BIDDER? - We like the risk/reward profile of
LCOS stock, based on our view that of the possible scenarios, the most likely
ones point to a higher stock price. If the deal closes as planned, which we
feel is most likely, we want to own LCOS stock because we like the prospects
for the new, combined company. We estimate the combined network will reach 100
million unique viewers across television and the Internet combined. The merger
effectively moves Lycos from a position of pursuing one large market of
national advertising and focuses the combined company on two additional large
markets of local advertising and e-tailing.
If CMGI is able to find a higher bidder for its LCOS stake, we want to own LCOS
for the higher take-out. However, we are challenged to come up with other
obvious buyers. AOL is a possibility, as it may need to buy someone to replace
the Excite search/directory functionality once the deal with Excite expires.
Microsoft is another possibility, although it is not obvious it could get past
anti-trust concerns, or even that it needs Lycos. Another interesting suitor
is Amazon, which could exploit the commerce-related content and swap out the
lesser Lycos brand. Intel also seems to be looking to build a portal to
promote its partner brands. A third scenario could be that LCOS remains
independent, which we find both unlikely and negative as we believe the USA
Lycos Network has a much better chance of growing into its valuation than Lycos
alone. Finally, the deal could close at current terms, but evoke a negative
response among investors. This scenario, the least likely in our view, would
send LCOS stock back down to where it was immediately after the deal was
originally announced in renewed disappointment over the valuations involved.
SORTING THROUGH THE GROWING GROUP OF EMERGING COMPANIES -- We continue
to focus on the big networks, but selectively look for catalysts to help the
newer stocks.
SPORTSLINE SET FOR BIG BASKETBALL TRAFFIC -- Next week we expect SportsLine to
report record traffic results as a result of the NCAA finals. Looking forward,
we expect traffic boosts from AOL, Excite, and CBS to help SPLN close the gap
with ESPN. We believe the stock is well positioned to move near term.
MODEM MEDIA RECOVERS FROM POST-DEAL JITTERS - We like Modem Media's
prospects over the next two years as big brands spend more in online direct
marketing, validating Modem's strategy to focus exclusively on larger brands.
The current model is moderately scalable as new customers are added and each
spends more online, leading to a future model that could be highly scalable if
MMPT is successful in structuring pay-for-performance contracts with clients.
The stock has been wild, trading from $16 to $55 on the first day of trading,
to the glee of retail buyers trying to catch the IPO wave, but scaring rational
investors. We believe that when the stock settled in the low $20s many felt
comfortable buying again, pushing the stock back to its current level above
$33. We continue to like MMPT, although we expect a more gradual climb in the
share price. Looking out one or two years, MMPT has the ability to charge a
higher price for delivering customers through pay-for-performance direct
marketing, which could make our 2000 and 2001 estimates very low.
E-Tailing Update -- Lauren Cooks Levitan 415-693-3309, lauren@rsco.com
Amazon's Newest Premiere Partner - Amazon's announcement of a strategic
agreement with Dell Computer is yet another example of the e-tailer's
burgeoning portal status and could signal the company's next product category.
Currently, Amazon's checkout page features links to both Dell and
Drugstore.com, for which we believe it will receive lead fees. Dell also
features a link to Amazon. We would not be surprised to hear future
announcements with other PC companies to build out a PC store. In our opinion,
Amazon is the ideal e-tailing partner on the Web today and is quickly
establishing itself as the first franchise e-tail portal. Dell potentially
offers Amazon a quick and easy entry into a new product category. We believe
that in order for Amazon to remain a best-of-breed e-tailer, the company must
partner with only the most recognized and highly regarded brands. In addition,
we continue to believe that software will be one of the next product categories
for the company and would not be surprised if it partnered with Digital River
as its outsourcing agent.
Amazon -- Growing into its Valuation - We believe that Amazon's recent
investment in Drugstore.com and linking agreement with Dell Computer is
pointing to an evolving business model, which demonstrates how the company is
growing into its valuation. When we consider Amazon's current 6.2 million
customers spent on average $98 in 1998, it is not hard for us to imagine, by
our estimates, that 15.7 million customers will spend $135 each in the year
2002, leading to roughly $2.1 billion in revenues. Given Amazon's magnetic
brand and the growing allure of Web shopping, we would not be surprised if
average spending doubles or even triples by that time. This model reflects
Amazon's impressive e-tail business, but not yet its expanding rental revenues.
According to the company's recently filed 10-K, customer acquisition costs
declined in 1998 as advertising expense decreased from 14.3% of 1997 sales to
9.9% of 1998 sales and other marketing expenses declined from 13% to 11.9%. We
believe the combination of revenue growth, margin improvement from lead-fees,
and lower customer acquisition costs point to long-term profitability. In the
near term, we expect more deals to provide stock catalysts. Based on these
factors and our sense that the current pace of business remains strong, we rate
share of Amazon.com a Strong Buy. |
