HQ:Exclusivity Concerns Overdone; Time to Buy the Stock!Target $50
* ATHM shares have been severely pressured over the last year as a result of
concerns regarding open cable and the Excite merger.
* We believe forthcoming partnerships with DSL providers and the issuance of a
tracking stock for the Excite business could catalyze stock performance.
* ATHM shares now trade at 11x our estimated 2001 revenue, compared to 22x for
the DSL providers and 10x for other "Internet-over-cable" plays, despite
Excite@Home's broadband dominance.
* Using trading multiple and sum-of-the-parts analyses renders a price target
of $50 per share.
* We are reiterating our Buy rating on Excite@Home.
The World's Largest Consumer Broadband Internet Services Company
Excite@Home shares have declined over 60% to $35 per share, from a high of
roughly $95 per share in April 1999. We believe that the decline has been a
result of concerns regarding the future of the company's exclusivity contracts
with its cable partners as well as issues surrounding the broadband ISP's
merger with Internet media provider Excite. Furthermore, we believe that the
market's perception of the company's fundamentals has been negative. A look
at the numbers, however, tells a very different story.
The Broadband ISP
With 1.15 million broadband customers, Excite@Home is the largest consumer
broadband ISP in the world. The company controls 60% of the US cable modem
market and 38% of the US broadband market (including cable modem, DSL, and
other broadband providers), and has a flourishing business abroad.
Excite@Home is also the 7th largest ISP in the US and the 9th largest ISP in
the world, even if we compare it with narrowband providers. Furthermore,
Excite@Home experienced almost 250% subscriber growth in 1999, making it one
of the fastest growing B2C ISP in the United States last year. Finally, the
company recently introduced a free narrowband Internet service offering.
Broadband service and free service have been the most significant concerns in
the B2C ISP industry, and Excite@Home addresses both of these markets.
Through partnerships with cable operators such as AT&T, Comcast, Cox, and
Cablevision, Excite@Home has a broadband footprint that covers roughly 60% of
the country. This year, we expect the company to forge relationships with DSL
providers to supplement and complement its cable footprint. We believe
Excite@Home will work with DSL providers to provide broadband service in areas
in which its cable partners do not have near-term plans to upgrade the
existing infrastructure to support 2-way, high-speed access. Furthermore, we
believe the company will work with DSL providers to extend its broadband
footprint in areas where it does not have a cable partner. As a result,
Excite@Home should be able to maintain the largest broadband footprint in the
country.We do believe that open cable will become a reality in 2002 and that
Excite@Home will lose its exclusivity arrangements with the cable operators.
Nevertheless, at that point, we expect Excite@Home to have 5-6 million
broadband customers, giving the company a substantial lead on the competition.
Furthermore, we believe Excite@Home could receive preferential treatment from
its cable partners (which are also investors) post-exclusivity.The Web Portal
While viewership to the Excite portal has been mediocre over the past several
quarters, with roughly 25 million unique visitors (according to Media Metrix),
the Excite media properties once again rank among the top five most frequently-
visited properties on the Web. Management has already indicated plans to
issue a tracking stock for the Excite business, which could unlock hidden
value, as well as allow for more flexibility with the media business. We
estimate that the Excite business alone could be worth $23-46 of Excite@Home's
share price. Finally, the Excite portal is currently the most productive new
subscriber generator for the broadband subscription service.
ValuationValuation of Excite@Home shares has always been a challenging subject,
particularly with few other public broadband plays, as well as the hybrid
nature of the company's business model. As a result, we are presenting
several valuation methodologies, all of which we believe demonstrate the
attractiveness of ATHM shares at current levels.Comparable Trading Multiples
ATHM shares currently trade at 11x our estimated 2001 revenue. We believe the
most comparable broadband plays include other Internet-over-cable companies
such as High Speed Access, Softnet, and Worldgate. On average, these
operators trade at 10x estimated 2001 revenue. Furthermore, DSL operators
such as Covad, NorthPoint, and Rhythms trade at 22x 2001 revenue. Thus, on
average, our collection of broadband service providers trades at 15x 2001
revenue. Ascribing a similar to multiple to ATHM share renders a price target
of $50.
Company Ticker Price EV (000s) 2001E Rev. (000s) EV/Rev.
CAIS Internet CAIS $39.94 $1,272,781 $120,000
Covad COVD 88.13 9,965,875 450,000
Excite@Home ATHM 35.44 15,652,813 1419,000
High Speed Access HSAC 19.88 107,1125 100,000
NorthPoint NPNT 25.56 3,547,250 200,000
Rhythms RTHM 45.25 3,683,000 140,000
Softnet SOFN 35.50 589,000 65,000
Worldgate WGAT 31.06 623,438 70,000
AverageSource: Company reports and Chase H&Q.
We believe that given Excite@Home's dominant broadband market share, exclusive
relationships with major cable providers, and alternative broadband platform
opportunities, the stock should trade at a premium to the group. Currently,
other market leaders, such as Yahoo!, AOL, and Amazon.com, trade at premiums
of 50-60% compared to their respective peer groups. Even if we ascribe this
premium to the lower "Internet-over-cable" multiple of 10x, our analysis still
renders a price target of $50 per share.
Sum-of-the-parts valuation
Because of the hybrid nature of Excite@Home's business model, we have also
valued the company by adding the value of its broadband subscriber business to
the value of its Internet media business. Applying the 2001 broadband revenue
multiple of almost 15x to Excite@Home's 2001 broadband revenue and the 2001
Internet media revenue multiple (excluding Yahoo!) of almost 16x to
Excite@Home's 2001 media revenue renders a valuation of roughly $50 per share.
2001E ATHM Enterprise Implied
Rev Multiple 2001E Rev Value Valuation
Broadband multiple 14.6 765,000 $11,169
Internet Media multiple 15.5 653,518 $10,130
Total ATHM $21,299 $48.18
Source: Company reports and Chase H&Q.Conclusion
Excite@Home is the largest provider of consumer broadband Internet service.
Excite@Home shares have been pressured as a result of the open cable debate,
as well as issues surrounding the Excite merger. We believe that by the time
open cable becomes a reality, Excite@Home will have garnered enough market
share and market power to establish it as one of the leading operators in the
consumer online service space. We also expect the company to explore service
delivery over platforms other than HFC cable. Furthermore, the Excite
properties are once again among the top five most frequently visited
properties on the Web. The issuance of an Excite tracking stock later this
year could unlock hidden value and allow for greater flexibility. We are
reiterating our BUY rating on ATHM shares. |
