BANCBOSTON ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
mailto:Keith@rsco.com
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June 25, 1999
The Web Report ˆ Volume 2, Issue #25
This week, the NETDEX index rose 1.6% from last week to 564.93. For
comparison, the NASDAQ ended the week up 0.4% from last week.
NEW SITE LAUNCHED ˆ We just launched the second edition, adding more
content to the site. Now when you visit internetstocks.com
you will find real-time news stories on Internet stocks, a portfolio
manager to track your stocks, and more comprehensive coverage of
emerging sub-sectors. We are now offering research reports written by
BancBoston Robertson Stephens' research analysts as part of a service
provided by Multex.com. The reports are designed to complement the
weekly Web report by adding additional insight into company direction
and prospects. You‚ll also find two new sections (Internetstocks 101
and FAQ) to answer some of your most common questions about the sector.
We will continue to offer access to slides and audio from recent
speeches. We would welcome any comments and suggestions. Please stay
tuned for our advertising campaign, which starts soon around the Web.
RECOVERY SLOWLY CONTINING ˆ We have been encouraged by the modest
recovery in many stocks and anticipate further progress as we near
reporting season, with Yahoo! scheduled to be first on July 7th.
Many of our stocks have rebounded from recent lows, but are still off
significantly from recent highs. The following is a list of these
stocks, including the percent each has rebounded recently and the
percent each has to grow to reach recent highs, ranked by who has the
greatest percentage to retrace: DoubleClick (20%/50.5%), Network
Solutions (39%/50%), Infoseek (24%/46%), Amazon.com (28%/44%), Excite
@Home (44%/40%), Digital River (40/40), CMGI (31%/35%), AOL (24%/33%),
Yahoo! (30%/29%), Priceline.com (44%/27%), CNET (31%/26%), Media Metrix
(21%/20%), and Lycos (33%/17%).
Some of the other stocks we cover have rebounded to a lesser extent.
These include (ranked by percentage each has rebounded): eToys (4%/97%),
Alloy (9%/83%), SportsLine (4%/40%), Gemstar (9%/10%), eBay (8%/30%) and
TicketMaster Online-CitySearch (3%/45%), MapQuest (16%/41%), and
ValueAmerica (18%/61%).
WHAT SEASONALITY? - We were relieved to see May Media Metrix numbers
were better than expected, with minimal signs of seasonal impact from
spring. According to the latest results, 61.9M individual users
accessed the Web from home or work in May, up 1.3% from 61.1M in April.
This is slightly better than expected, as we had expected the number to
be flat or even slightly down, due to summer seasonality. The average
Web user accessed the Internet 12.2 days in May up slightly from 12.0 in
April and spent an average of 7.6 hours online in the month, up slightly
from 7.5 hours in April. We view these results as positive, in view of
concerns that usage would decline.
AOL EXPANDING ACCESS ALTERNATIVES - This week, AOL announced a strategic
alliance with Hughes Electronics, which includes a $1.5 billion
investment by AOL in Hughes. This investment will help Hughes expand
its satellite products and services, which include DIRECTV, DirecPC and
its 2-way satellite service called Spaceway. In return for AOL‚s
investment, Hughes will promote AOL TV and AOL Plus high-speed service
to its own customers, which include 7 million DIRECTV subscribers. We
expect a satellite version of AOL Plus will be available in early 2000.
We view this announcement as another step in AOL‚s overall broadband
strategy. As high-speed access becomes a necessity over the next year,
we believe AOL is well positioned to reach DSL, cable, wireless and now
satellite audiences. While only an estimated 40,000 people in the U.S.
receive Web access through Hughes satellites right now, we believe
satellite offers an attractive alternative, as Web access is more easily
bundled with existing television programming. Other related news this
week included a formal announcement that AOL plans to launch a beta
version of AOL 5.0 in July. The new version will be designed to handle
both narrow band and broadband connections. AOL also recently announced
a DSL agreement with Compaq, under which new Compaq Presario Internet
PCs will be DSL-enabled with special features, including pre-installed
AOL software. AOL also announced a strategic agreement with 3Com
Corporation, to bundle AOL software into selected Palm Computing
handheld products, allowing users to access their AOL e-mail accounts
anywhere and anytime. Longer-term, the two companies plan to develop an
AOL-branded wireless handheld organizer, as well as integrate complete
AOL features and functionality into other Palm products. We view this
news as significant, in that the Palm Computing platform has an
installed base of over 4 million.
GEMSTAR CLOSER TO PATENT PROGRESS - Gemstar appears to be making
progress on litigation and new business partnerships which we believe
could lead to a fundamentally different view of the company‚s
potential. We believe we could hear some initial news out of the
General Instrument arbitration within 2 to 3 weeks, with final results
perhaps 3 or 4 weeks later. We grow increasingly convinced the outcome
will be favorable to Gemstar, mirroring a nearly identical earlier
victory against Scientific Atlanta. We believe the upside is a
substantial boost to our license revenue estimates. We also appear
closer to possible resolution of the more important litigation with TV
Guide/TCI/AT&T, which continues in court-ordered settlement talks. We
believe another settlement conference could happen within two weeks,
possibly generating good news at that time. At the least, we expect
settlement talks may end then, either positively with the two sides
finalizing a settlement agreement that could be made public perhaps a
month later; or negatively, with the case being returned to litigation
that could take a year to complete. We expect any of this news would
affect Gemstar‚s stock much more than its business, and we continue to
tilt our expectations towards the positive. We expect TV Guide should
be motivated to settle, as it may be unable to survive a ruling for
Gemstar which would negate the exclusive agreement for AT&T/TCI to use
TV Guide‚s EPG. We believe one benefit to AT&T of accepting the $5
billion investment from Microsoft is that AT&T can still have access to
Gemstar‚s guide through Windows CE, even if talks between TV Guide and
Gemstar fail. Gemstar appears eager to settle on favorable terms,
although the case has become much less important to Gemstar than to TV
Guide, in our view. We continue to believe Gemstar can distribute its
guide to millions of households through new-model television sets,
bolstered by satellite TV deals. The Hughes Network deal has recently
been made stronger by the partnership between AOL (another Gemstar
licensee) and DirecTV, in our view. We believe Gemstar will end up in a
prime position to benefit from interactive television, having favorable
licensing and revenue sharing agreements with Microsoft and AOL, and
possibly later with AT&T.
STARMEDIA: This week we initiated coverage on StarMedia, the leading
online network in Latin America, with a Buy rating. With Latin America
Internet usage growing significantly, there is a growing need for a
full-service network offered in the local languages of Spanish and
Portuguese. StarMedia provides original and 3rd party content through 17
content channels, including community and search channels, all in
Spanish and Portuguese dialects. By being early in establishing the
most recognized Internet brand in Latin America, StarMedia appears to
have beaten potential U.S.-based competitors like AOL and Yahoo!. In
addition, StarMedia announced plans this week to enter the Spanish
market, by opening an office in Madrid later this year. We believe
StarMedia can grow into a substantial valuation based on its ability to
reach the majority of new Latin American Web users yielding increasing
advertising, commerce and access revenues.
YOUBET ˆ This week we initiated coverage on Youbet.com, which is the
only company offering a legal way to wager on horseracing on the
Internet. All other domestic-based Internet gambling is illegal.
Youbet.com‚s product, the You Bet Racing Network, provides an online
tool to analyze, wager on and watch horse races from up to 28 tracks
around the U.S. Youbet.com has a joint venture with Ladbroke, the
largest event wagering company in the world, to take bets fromYoubet.com
customers. The market for wagering is very large. We believe that the
company has a significant technology, time, and capital advantage over
competitors that may enter the market at a later date. We expect
Youbet.com to launch its marketing program shortly. By year-end, the
company intends to send 1 to 2 million discs to handicappers, casino
customers, and online traders. We expect that the majority of its
revenue will come from commissions on wagers, followed by subscription
fees. Most horse bettors are computer users. We estimate Youbet.com‚s
potential market could be over 3.5 million subscribers. However, we
estimate that Youbet.com does not need anywhere near these subscriber
levels to have a meaningful business. Our model shows EBITDA breakeven
in 2000, when we forecast the company should finish the year with
140,000 domestic subscribers. We estimate Youbet.com will be profitable
for the full year 2001 and we forecast EPS of $1.00, fully taxed.
Applying P/E multiple of 40x produces a potential price range over $40.
CMGI: There have been reports that CMGI may be in talks to to buy Alta
Vista and the other Web properties owned by Compaq, including
Shopping.com and Zip2.com. We would not be surprised by this type of
acquisition. CMGI‚s has previously indicated it may step up the size of
its investments to potentially include public companies and/or spinouts
of non-Web companies. Given CMGI‚s current size, it may be difficult to
create significant incremental shareholder value by just continuing to
make venture investments. CMGI is also challenged by its current
structure to avoid taxes as a holding company, which would be partially
solved by a buy, build and hold strategy. If this occurred, we would
expect it would be the first of many acquisitions to build a network,
which could be competitive. We doubt Compaq could have created a store
or mall on its own that would have maintained a competitive pace with
the other manufacturers and/or the emerging major Web malls, from Amazon
to Value America. Given CMGI‚s track record of building successful Web
companies, we believe it is well suited to provide a complete outsource
commerce capability to Compaq and/or other legacy businesses looking to
sell products on the Web. What else might CMGI buy? It may start with
its existing portfolio of investments, including Lycos. While this may
be awkward after the failed three-way merger, it might make strategic
sense. The challenge with Alta Vista as a first step may be sensitivity
to price paid, given CMGI‚s previous objections to the Lycos price and
recent reactions to acquisitions. Alta Vista may also have lost some
momentum through its ownership change from Digital to Compaq. We
believe CMGI will continue to build value, with or without Alta Vista.
LYCOS: While we do not expect CMGI to buy Lycos, we do expect Lycos to
be more aggressive making its own acquisitions. In addition, Lycos
continues to make significant progress on its own. On Monday, Lycos
announced a worldwide marketing deal with Lotus Development
Corporation. Under the agreement, approximately 38 million Lotus Notes
users will be able to customize a My Lycos homepage in their Notes
desktop. Due to a pre-existing deal with AOL, Lotus Notes‚ users will
have an option between choosing My Lycos or My AOL News on the welcome
page of Lotus Notes 5.0 in both the U.S. and U.K. While there was no
money put up front for this deal, Lotus and Lycos will share in
advertising revenues generated through the My Lycos homepages. The
arrangement puts Lycos boldly in front of many more desktops in the U.S.
and rest of world. For reference, Lycos reached approximately 30
million unique Web users in the month of May, according to Media Metrix.
DCLK: What would happen to DoubleClick if CMGI bought AltaVista, given
CMGI‚s ownership interest in DCLK competitor Engage? While Alta Vista
has represented a significant percentage of DCLK revenues, that
percentage has been declining. When adjusted for the Abacus Direct
merger, it only represented 13% of Q1 revenues, down from as high as 60%
in the past. We expect this percentage to decline further as DCLK
integrates Abacus Direct and moves increasingly towards providing
higher-margin technology outsourcing services, including the data
business. Finally, Alta Vista and DCLK signed a 3-year contract, of
which approximately 2 * years remain. As such, we do not believe a
merger between CMGI and Alta Vista would have a real negative impact on
DCLK. |
