GS Parekh's upgrade (OCR'd, but only lightly proofed, so trust details at your own risk. Clarifications provided on rqst):
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DoubleClick, Inc.
8:42 AM April 20, 1999
Upgrading Leading Advertising Solutions Provider to RL
Goldman Sachs Investment Research
Michael Parekh
Vik Mehta
We are upgrading DoubleClick to our Recommended for Purchase List rating from Market Outperformer. DoubleClick has developed the largest and most lucrative Internet advertising network and offers a suite of services for both Internet advertisers and web publishers.
Near-term catalysts include a full launch of 'Closed-Loop Marketing' and Q1:99 earnings release (4/27/99). Our billings, rev and EPS EST's for the qtr are $27m, $l8.7m and $<0.13> but we expect 10%+ upside to our rev est. We believe the shrs represent a core holding both near-& long-term.
* Catalysts: We see two primary near-term catalysts for DoubleClick.
First, DoubleClick reports Q1:99 earnings Tuesday, April 27. Media
Metrix reported record frequency and usage for the month of March which provides further credence to AOL's, YHOO's and XCIT's strength in page views during the post-Christmas cycle. We expect DCLK to be an important beneficiary of the underlying strength in web usage metrics and would expect the company to present 10% to 15% on our published revenue estimate. The company recently reported a 60% growth in total ads served between the month of Dec. 98 and Mar. 99 and as such provides a proxy for the robust performance of its advertising network. In addition, next week we would expect additional catalysts in the Internet advertising sector as the 'Web Advertising '99' conference kicks off in NYC.
* Second, the company is in the process of rolling out Closed-Loop
solutions for the ad buyers to facilitate rapid analyses of ad
campaigns. We would expect these initiatives along with the ongoing
rise in DART-only sales to improve gross and operating margins, driving the company to operating profitability in late 2000. To that extent DoubleClick is hiring people across the board.
* DCLK has sold off 37% from its highs year to date, and we believe the opportunity is compelling and substantial for DoubleClick to continue to prosper going forward. With the Internet advertising market expected to reach $9.0 billion by 2002, we expect the advertising networks to capture 15% to 20% ($l.4B to $1.SB) of the overall market with DCLK maintaining a leading share. We believe that DoubleClick represents a core holding both near-term (based on catalysts identified above), as well as longer term. Accordingly, we are adding it to our Recommended List along with our other favored outsourcing names (see separate note).
VALUATION: Assuming DoubleClick grows its advertising billings 50% in 2001 and 2002, our implied revenue estimate represents 20% of the market where in 2002, a market it presently dominates with approximately 50% share. As E-commerce (B2C) opportunities grow on the web (2002E $177 billion), we expect DCLK to play an important role as a direct marketer and as an outsourced solutions provider to the E-commerce destinations, adding yet another area for DCLK to provide upside surprises.
The shares presently trade at 26x and 18x our 2000 revenue and billings estimates. In relation to other segment leaders, we expect the multiple to have opportunities for expansion as the scale, leverage and profitability of the model are demonstrated. Over the next several quarters, we expect DoubleClick to add new, higher margin revenue streams for Closed-Loop Marketing, DART for Advertisers, DataBank and Boomerang. Each of these can further serve as catalysts over time and also provide comfort in higher P/Sales multiple.
RISKS: While there are several risks to a rapidly growing company, in
light of the ongoing changes at Compaq, it is important to highlight that AltaVista represents 44% of DCLK's revenue streams. Although the two companies entered a 3-year deal that cannot be unwound even in the case of an acquisition of either party, it is important for DCLK to maintain and strengthen the relationship. Due to the large percentage of contribution, Altavista traffic and reach metrics can also serve as catalysts for DoubleClick's stock performance.
REVENUE RECOGNITION: DoubleClick reports Altavista results in two lines: (l) billings and (2) revenues. Altavista revenues will now be reported as billings from Altavista minus Doubleclick's cost of goods sold (gross margin 30%) on those billings. Starting in the first quarter of 1999, DoubleClick will report lower revenues from Altavista (because it will be reporting the gross profit dollars from Altavista), but an overall higher gross margin for the entire company (about 48.0% using the new revenue- recognition policy versus the 33.3% reported in the fourth quarter of 1998). The changes are not retroactive, and no restatements of prior financials will occur. However, we do expect the company to report both Altavista 'billings' (previously 'revenues') and revenues going forward.
The revenues from DART (outsourced ad serving) and other reporting and
analysis tools are reported in a separate line item. The DART and related revenue streams typically have higher (75%) gross margins and are an important growth area for the company.
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(Lwolf, did you get the report I sent yest?) |
