11:10am EST 24-Mar-99 BancBoston Robertson Stephens (Benjamin, Keith 415-693-3
Internet Group Earnings Preview (Page 1 of 3)
Internet Group
Earnings Preview
STOCK STRATEGY:
** As we look to quarterly reporting season, we expect to see record quarters
for most of the Internet companies, despite results being up only modestly
over the December quarter.
** Fundamentals of the group remain strong, with audience growth, increasing
advertising and commerce revenues, and the path to profitability becoming
much clearer.
** We believe there is an accelerating shift in economic spending towards the
Internet, which will justify the valuations on a few emerging companies. We
continue to focus on the biggest companies that are moving faster to grow
into those valuations, by beating quarterly estimates or using inflated
stock currencies to acquire value through acquisition.
** We expect the AOL, Amazon, Lycos, Network Solutions, and Yahoo! to show the
biggest positive surprises on a percentage basis. Our focus stocks remain
Amazon and Lycos.
** We believe Amazon's formula for growing into its valuation is becoming
clearer, as it uses its cash to build superior fulfillment capabilities for
its core products and its stock to add new product categories.
Ticker Period BRS BRS Consensus Rating Report Co EPS
E Revenue EPS-E Date
AMZN 1Q:99 $ (0.29) $260 M $ (0.29) Strong Late High Yes
$119 3/8 F1999 $ (0.93) $1190.9M $ (0.92) Buy April
FY: Dec F2000 $ (0.22) $1561.8 M NA
In our opinion, Amazon is the model e-tailing portal and partner. We believe
its focus on building superior fulfillment capabilities will continue to
differentiate it from its virtual competition. We expect it will expand past
books to such categories as software, for which it may use Digital River as an
outsourcing agent. The Amazon brand has attracted one of the biggest Web
audiences, which it can effectively lease to partners. Examples include its
recent investment in Drugstore.com, and recent linking agreement with Dell
Computer, both of which point to an evolving business model. 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. Our
current model reflects Amazon's impressive e-tail business, but not yet its
expanding rental revenues. Customer acquisition costs have continued to decline
as a percent of sales. 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. For the quarter, we expect modest sequential growth in revenues will
be based on a slight increase in the number of shoppers and higher revenues per
person. We rate the shares of Amazon a Strong Buy.
Ticker Period BRS BRS Consensus Rating Report
PS-E Revenue EPS-E Date e?NSOL 1Q:99 $0.25
$36.0 M $0.24 Buy 4/22 High Yes
$231 9/16 F1999 $1.20 $172.0 M $1.18
FY: Dec F2000 $1.70 $258.7 M NA
We expect another strong quarter for Network Solutions as the world rushes to
establish Web identities. The company recently announced it had registered its
4 millionth name. We continue to like NSOL's major marketing head start, and
believe there is big upside to our estimates as new registration rate
accelerates and the company layers in additional services. Regulatory
confusion should be substantially resolved within weeks, as the first five new
registrars are selected and as the fee split between NSOL's registry fee and
the registrar fee. The stock appears to be moving past concerns of potential
new competitors, which we believe will not materialize for many quarters, if
not years. Even then, we expect Network Solutions will remain the leader by a
wide margin. We believe the fact that Yahoo! and Netscape have chosen to
partner with Network Solutions reinforce the company's unmatched competitive
position. We expect more deals early in 1999. Further, the company is in the
process of more aggressive marketing of its primary and complementary services,
which we believe can significantly increase revenues per account. We believe
there is considerable long-term upside to our estimates.
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