BANCBOSTON ROBERTSON STEPHENSKeith E. Benjamin, CFA
April 16, 1999
The Web Report -- Volume 2, Issue #15
INTERNET STOCKS TAKE A BREAK -- The Internet stocks finally took a break,although it was small compared with the last two months of almost uninterruptedascent. This week, the NETDEX index closed down 5% from last week at 1046.95.This was up approximately 551% over the same period last year. For comparison,the NASDAQ ended the week down 2% from last week, but still up 38% from thesame date last year.
A GAME OF CHICKEN: We were encouraged to see the first break from frenzy thisweek. While we suspect many were looking for a post-reporting season lull, thestocks kept going up. It has been particularly disconcerting to see companiesin narrow and competitively challenged markets show stock spikes to valuations
difficult to quickly grow into. The challenge for the lesser-company stockshas been figuring out when to sell, because the valuation ranges started highand went to galactic levels. This week, many investors blinked. We would notencourage waiting any longer. We expect further divergence between the winners
and laggards, with the few standouts declining a bit before recovering to new highs and most stocks falling and not getting back up. We expect reportingseason to remind investors how difficult it is to compete on the Web, with few
companies having big, scalable brands.We only want to own the big franchises showing fundamentally sound business
models with marketing more a function of word-of-mouth than aggressivespending. These names at the top of our list still include AOL, Amazon, Lycosand TicketMaster CitySearch, Network Solutions, and CNET. We expect each toreport strong quarters to help investors appreciate how quickly each company
can grow into its valuation.IPO SPREAD NARROWING -- We believe we are beginning to see a slightly morerational IPO process in terms of the entourage of Internet companies being
introduced to the market each week. Comparing Q4 Internet-related deals to Q1,we found it interesting to note that the average first day jump from the IPOoffer price to the first trade, declined from approximately 225% in theDecember quarter, to approximately 156% in Q1. We expect this spread to
continue narrowing as more supply hits the market and as stocks stop going upafter the first day of trading. For reference, the average percentage changefrom the closing price on the first day to the price two weeks later was up31.4% in Q4 and up only 14.3% in Q2. We believe investors will learn to avoid
this frenzied trading as quickly as the first few deals start going down afterthe first trading day. We have already seen a few examples.
NETWORK SOLUTIONS -- We believe NSOL is continuing to widen its marketing lead,despite mis-perceptions of competitive challenges. Network Solutions signed 18U.S. companies to its Premier Domain Registration Service Program in Q1:99,bringing the total to 174 ISPs and Web hosting and design firms worldwide. We like the stock's current risk/reward profile and would begin to build positionsnow, prior to resolution of the issues surrounding who the next registrars willbe. We expect the company to report a very strong March quarter report on April 22. |
