HQ:Time to Buy the Stock!Target $50
Excerpts of HQ research on 2/24/2000, ATHM price was $35.44 used for the valuation calculation below.
Excite@Home (ATHM)
Exclusivity Concerns Overdone; Time to Buy the Stock!
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.
We believe Excite@Home is positioned to be a primary beneficiary of the largest and most untapped growth area
of the Internet, namely high-speed services to and from the 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.
Excite@Home is the
largest consumer
broadband ISP in the
world.
With 1.15 million broadband customers, Excite@Home is the largest consumer
broadband ISP in the world. The company controls 60% of the U.S. cable modem market
and 38% of the U.S. broadband market (including cable modem, DSL, and other
broadband providers), and has a flourishing business abroad. Excite@Home is also the
seventh largest ISP in the United States and the ninth 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.
We expect the company
to forge relationships
with DSL providers to
supplement and
complement its cable
footprint.
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 two-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.
B2C Internet Landscape
Source: Company reports, Chase H&Q
Note: All numbers are in thousands.
Adv. and Unique Av . Daily North
NB BB Free Subscription Commerce Visitors each Pa e Views America Intl.
Internet Media
ATHM 0 1,150 in dev. 37% 63% 25,439 35% 123,000 72,000 13,000
AOL 23,800 0 0 66% 27% 56,457 78% 860,000 NA NA
LCOS 0 0 21,000 0% 100% 31,404 43% 101,000 NA NA
YHOO 0 0 50,000 0% 100% 44,258 61% 400,000 NA NA
Traditional ISPs
ELNK 2,988 25 0 96% 4% 5,390 7% 86,000 NA NA
P GY 2,475 55 0 NA NA NA NA NA NA NA
Free ISPs
NZ O 0 0 1,450 0% 100% NA NA 56,200 NA NA
JWEB 550 0 1,780 72% 24% 8,387 12% NA NA NA
Internet Cable
HSAC 7 16 0 100% 0% NA NA NA 2,000 0
SOFN 0 7 0 100% 0% NA NA NA 2,400 0
WGAT 0 16 0 100% 0% NA NA NA 1,500 0
D-CLECs
COVD 0 57 0 100% 0% NA NA NA 29,000 0
THM 0 13 0 100% 0% NA NA NA 30,000 0
NPNT 0 24 0 100% 0% NA NA NA 31,000 0
Footprint Metrics Composition Subscribers
evenue Web Property Broadband
We 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 five to six 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
We estimate that the
Excite business alone
could be worth $23 to
$46 of Excite@Home?s
share price.
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 to $46 of Excite@Home?s share price. Finally, the Excite portal is currently
the most productive new subscriber generator for the broadband subscription service.
VALUATION
Valuation 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
Exhibit 2
Excite Valuation Analysis
Property Ticker Rating Price EV (000s)
2001E Rev.
(000s) EV/Rev.
Implied
Value
Yahoo! YHOO B $166.20 $99,817,094 1,283,000 77.8
Lycos LCOS B 68.69 6,275,525 425,000 14.8
LookSmart LOOK B 41.13 3,438,300 168,000 20.5
AskJeeves ASKJ B 63.31 1,956,356 176,000 11.1
Average 31.1 $46
Average (excl. YHOO) 15.5 $23
Source: Company reports and Chase H&Q
service providers trades at 15x 2001 revenue. Ascribing a similar multiple to ATHM
share renders a price target of $50.
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% to 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.
Exhibit 3
Broadband Comparable Valuation Table
Company Ticker Rating Price EV (000s)
2001E Rev.
(000s) EV/Rev.
CAIS Internet CAIS B $39.94 $1,272,781 $120,000 10.6
Covad COVD NR 88.13 9,965,875 450,000 22.1
Excite@Home ATHM B 35.44 15,652,813 1,419,000 11.0
High Speed Access HSAC NR 19.88 107,1125 100,000 10.7
NorthPoint NPNT NR 25.56 3,547,250 200,000 17.7
Rhythms RTHM B 45.25 3,683,000 140,000 26.3
Softnet SOFN NR 35.50 589,000 65,000 9.1
Worldgate WGAT NR 31.06 623,438 70,000 8.9
Average 14.6
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.
Exhibit 4
Sum-of-the-parts Valuation
2001
Rev Multiple
ATHM
2001E Rev
Enterprise
Value
Implied
Valuation
Broadband multiple 14.6 765,000 $11,169
Internet Media multiple 15.5 653,518 $10,130
Total ATHM $21,299 $48.18 |
