Brian Oakes, an Internet stock analyst for
Lehman Brothers who made his name with
prescient calls on America Online, shares his
thoughts about where Internet media and
services stocks are headed.
October 5, 1999
Ed McCarthy: Welcome to our Money chat today. Thanks
for joining us. Our guest today is Brian Oakes, an Internet
analyst with Lehman Brothers.
Audience: You've been tracking AOL for several years. Do
you still evaluate the company with the same methods
you used 5 years ago?
Brian Oakes: Not all the same methods; we've added
new methods given the fact that the company has
matured since then.
Audience:: What is your current rating on AOL?
Brian Oakes: It's a 1-buy rating with a two hundred
dollar target price. That's the highest rating we have here
at Lehman Brothers.
Audience: Will the MindSpring and EarthLink combination
offer more competition to AOL?
Brian Oakes: Not exactly. The two groups really go after
two different Internet users.
Audience: What kinds of Net companies are the best to
buy?
Brian Oakes: Primarily market leaders. We don't like
me-too Internet companies. The hottest group right now
is in the business to business space.
Audience: Is it better to invest in a high tech fund as
opposed to individual stocks?
Brian Oakes: It really depends on your own investment
criteria. The problem with high tech funds is you're not
sure of their exposure to Internet names or stocks.
Audience: What are the major risks you see in AOL's
future?
Brian Oakes: At this point in time I think there's very few
risks in AOL's future. I think the company's positioned well
to grow internationally, it is prepared for the convergence
of the TV with the Internet, and its domestic business is
as strong as ever.
Audience: What companies does it make sense for AOL
to partner with? For example, I just read that they did a
$33 million deal with Healthscape. Why? How does that
benefit them strategically?
Brian Oakes: The company was Medscape actually, not
Healthscape, and it's not so much to partner as that
Medscape wants access to the AOL customer base and is
willing to pay them for that right.
Audience: What is your take on AOL - China.com -
Xinhua News Agency alliance in China?
Brian Oakes: I think that's part of their international
expansion that will offer them great growth opportunities
in the Asian marketplace, which is one of the more
untapped Internet marketplaces today.
Audience: I've heard that AOL is trying to force Bells not
to push AWRE's G.Lite ADSL. Is it true?
Brian Oakes: We are not aware of that at all.
Audience: What kind of Internet companies are the best
investments? Portals? Search engines? Infrastructure?
Brian Oakes: At this point my view would be
business-to-business type companies, such as
VerticalNet, market leaders such as AOL, E-bay, Yahoo,
companies with significant earnings potential like Network
Solutions.
Audience: Will MSN ever be more of a threat to AOL?
Brian Oakes: I doubt it. Let me say I think Microsoft has
finally figured out that they're really a software company
and they're heading back to their software roots.
Audience: What's the future for online investing sites,
such as INDI, TSCM, etc.? Are they going to make a
comeback?
Brian Oakes: I believe sites like THE STREET.com have
their place on the Internet; it's a question of how big is
their audience.
Audience: What sector of the Internet stocks should we
be avoiding?
Brian Oakes: Some of the community sites like the Globe,
me-too Internet names such as UBID, single product
e-commerce names, like CDNOW.
Audience: How are Internet stocks valued? Seems like
they're way too expensive!
Brian Oakes: They're valued richly. It seems like they're
way too expensive; that assumes that we know the
extent of their models and at this stage of the Internet,
few people do.
Audience: If the PC manufacturers give away Net access
free with their machines, do you see that as a threat to
AOL's growth?
Brian Oakes: No, I see that as a packaging of Internet
access in some other form. Consumers are paying for
Internet access in that arrangement, and it will be
apparent to them.
Audience: With more ISPs entering the market, are AOL's
costs to retain customers getting too expensive? Will
these costs affect the stock someday?
Brian Oakes: There are more ISPs exiting than entering
the market. That said, comparing an ISP offering to the
AOL offering is like comparing apples and oranges.
Audience: What stocks are currently on your "Buy" list?
Brian Oakes: : AOL, VerticalNet, we have HOOVERS, High
Speed Access, TalkCity, and Auto-by-tel
Audience: Will Mr. Oakes be giving his evaluation of the
market? Its potential and its pitfalls?
Brian Oakes: That's a market strategist's role--I do
stocks. In my view the Internet market of stocks poised
for a strong yearend run, given a very strong background
environment of increasing subscribers, increasing usage,
increasing advertising and increasing e-commerce
opportunities
Audience: Would you consider Cisco and LU as good
Internet plays?
Brian Oakes: Again it depends on your investment profile.
I think the best Internet plays are Internet stocks.
Audience: What about MCI WorldCom?
Brian Oakes: Our telecom analyst, Blake Bath, has rated
it a 1-buy.
Audience: Now that the Fed has stood still, can the
Internet (ISP providers, big and small) get back to the up
trend they had going ?
Brian Oakes: Absolutely. That's why I feel the Internet
stocks will make a strong year-end run.
Audience: What are you feelings on ONSL?
Brian Oakes: I think they're going to have a difficult time
differentiating themselves and are in a very difficult
environment of computer sales primarily.
Audience: Who do you think is winning the portal race -
Yahoo!?
Brian Oakes: My answer would be it's not winning, it's
won, and it's YAHOO—game, set, match!
Audience: How do you see the environment changing for
stocks like AOL over the next few years?
Brian Oakes: I think AOL is the one name that has the
potential to get that halo that a Cisco and a Microsoft
have around it with investors, where you buy the stock,
put it away, and don't worry about it.
Audience: Ted Leonsis has been talking about 60 to 70
million subscriber base. If AOL achieves it, do you think
AOL's market cap will be more than MSFT?
Brian Oakes: If Ted says so :). I think if AOL can do 60
to 70 million subscriber base, then it would probably be
bigger than Microsoft at that point.
Audience: What are the Net stocks that are the best
value right now?
Brian Oakes: I think Network Solutions is a great value
here; AOL is a great value here; TalkCity.
Audience: Do you have a fixed target price on AOL or do
you change that price as events dictate?
Brian Oakes: We have a fixed target price until a
company surpasses our target price. My target price right
now is $200 --that's a 12 month target price.
Ed McCarthy: To follow up on the international theme, do
you see AOL's growth coming from US subscribers or
primarily international?
Brian Oakes: When you look ahead, AOL will have larger
growth rates international than domestic, and I do believe
international will start to become a more significant part
of the AOL story.
Audience: How do you see AOL getting into high speed
access?
Brian Oakes: I'm assuming the question means
broadband. I think a variety of ways, through the
agreements they have with the Bell companies for DSL. I
do believe we'll see AOL announce deals with cable
companies for cable broadband, and then there's satellite
& wireless, of which AOL already has an agreement with
Hughes for satellite broadband, and will probably have a
wireless deal at some point in the future as well.
Audience: Do you see any potential competitors for AOL
or have they just flat out won?
Brian Oakes: It depends on what you mean by
"competitor”. I believe we will never see another outlying
service to compete with AOL. Potentially when AOL starts
to move to the TV set there can be competitors in those
markets, but today in the online world, there's very little
real competition.
Audience: 60 to 70 million customers! Doesn't AOL have
only 8 - 10 million now? How much will they have to invest
to grab each additional million users?
Brian Oakes: They have over 20 million now, and when
you're thinking about 60 to 70 million you're probably
thinking over the next 5 to 7 years, and you have to
include the rest of the world that hasn't even started to
come online. Don't forget that 20 million AOL customers
only represents 20% of the US--a very small number.
Audience: Could you tell us more about TalkCity?
Brian Oakes: TalkCity is the leading independent chat
company on the Net that's bringing chat not just to the
consumer market, but also the business marketplace,
where corporations will use chat as a customer support
tool
Audience: What happens to AOL when other companies
offer Internet service connections for free?
Brian Oakes: I think free ISPs are the worst business
models I've ever seen in my life. They don't financially
make any sense and probably won't be around long.
Audience: What is AOL doing in the face of free ISP's in
the UK?
Brian Oakes: Two approaches. One is they announce
Netscape online, which is a barebones free ISP service
similar to FreeServe and then with the AOL product,
they've rolled out a lower connection charge because
what people misunderstand about the UK marketplace is
that free ISPs are not free to the consumer mainly
because you still have to pay for your telephone call.
Audience: But Brian, what's it going to cost them to grab
the huge market out there? I am asking because as these
costs rise, it seems as though profits will fall. It's like a
Warren Buffet question. How much does it cost to get one
customer?
Brian Oakes: AOL's costs of acquiring customers have
been falling for the past few years and when you expand
internationally, AOL's costs will be cheaper than anyone
else's primarily because of the pull-through demand that a
large US base of customers has for international users. By
that I mean the network effect that AOL's US base will
drive into international markets will help them acquire
customers much cheaper than a local provider that
doesn't have a US presence.
Audience: For an aggressive growth portfolio, what
(percent) allocation does Mr. Oakes recommend for
Internet stocks?
Brian Oakes: Aggressive would probably be 20 to 25%.
Audience: About free ISPs--today they are free
newspapers living from advertising; why not ISPs in the
future?
Brian Oakes: Primarily because they will never get
enough ads to offset the communication costs, let alone
customer support costs and development costs to offer a
quality service, much the way most newspapers still
charge for the paper, because free doesn't work. |
