BANCBOSTON ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
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January 22, 1999
The Web Report ? Volume 2, Issue #3
This week, as of January 20, 1999, Internet.com?s ISDEX index closed at
330.30, down 2.8% from last week, but up approximately 103% over the
same period last year. For comparison, the NASDAQ ended the week up 3%
over last week, and up 48% from the same date last year.
STOCKS FALLING INTO FAMILIAR PATTERN ? We are relieved to see the stocks
continue to drop down. Internet.com?s ISDEX has fallen 20% since the
beginning of last week. We have seen this before in almost every
quarter. Because of our view that underlying fundamentals remain better
than ever, we continue to believe the long-term trend for the stocks
will be up, not down. Short-term, after a few more companies report
next week, there may be fewer catalysts for retail and other investors.
Over the last year, Internet stock prices have fallen by roughly 20-45%
after each quarter, before recovering to new highs. After the September
quarter, the stocks kept moving on expectations of a hot e-tailing
holiday. After these December quarter reports, we expect a sequential
comparisons to the March quarter to be seasonally flat, leaving less
room for excitement.
MONSTER RECOVERY ? We believe the underlying fundamentals remain quite
strong, which we further believe will enable the leading companies to
grow into high valuations while the laggards fall. In our view, the
question is not whether or not the stocks should or will fall, but
whether or not they will recover to higher levels. Looking back, the
monster stocks tend to have fallen less and rebounded farther than the
averages. Of our ?monster? stocks, AMZN fell 18%, AOL fell 17% and YHOO
fell 15%, after the September reporting season. Recovered shortly
thereafter, the ISDEX rebounded by 150% by the end of December, AMZN
grew 250%, YHOO grew 120%, and AOL grew 60%. We would also include a
few new companies to our monster category, including eBay, which is off
almost 21% this week and 37.5% since the beginning of last week, and
TicketMaster/CitySearch, which is off almost 11% this week and 18% since
last week. While we believe there is more room for the monsters to
fall, we expect the pattern of recovery to continue based on solid
trends in Web economic growth.
REPORTING SEASON ENDING AND DEAL PACE PICKING UP - We believe we could
see a few names rebound next week, as we hear more positive reports of
strong Q4 results. Among the companies scheduled to report next week
are AOL, Amazon.com, eBay, Digital River, SportsLine, Infoseek,
NetGravity and TicketMaster Online-CitySearch. Amazon.com and
TicketMaster Online have already pre-announced strong revenue growth.
With the exception of AOL and eBay, we believe most of the remaining
companies are not positioned to report growth dramatically higher than
estimates. The group may be helped by announcements of acquisitions at
current or higher valuations. Still, we expect the lack of news and
rush of IPOs and secondary offerings will force investors to be much
more selective, which should still allow a few stocks to work.
AMAZON.COM MOVES TO THE TOP OF THE LIST- We would pick AMZN as our first
choice among fallen angels.
The stock is off 24% this week and 42.5% since the beginning of last
week. Looking back to 1998, there were plenty of opportunities to buy
the stock on dips and make money. From July 1998 to January, we have
seen five major corrections and rebounds, with the stock still up over
200% from its July lows. The down/ups from peak to trough, starting in
the beginning of July, end of July, August, September, and November were
-29%/+39%, -23%/+27%, -45%/+56%, -26%/+153%, and -14%/+193%. In
January, the drop has been 43%. While this might not be the near-term
bottom, it feels close enough, particularly as the company is scheduled
to report next week. It had previously announced strong revenues
without details.
We believe the market opportunity is the more important factor in the
stock than valuation. We believe Amazon has built the brand people
think of first for Web shopping. We believe this will enable revenue
volumes that can yield significant profitability long-term. We believe
the key question for Amazon remains its ability to build fulfillment
capability in more product categories to exploit its brand and growing
audience. The formula started with rapid delivery of a broad selection
of books, with the help of an existing distribution system. The company
is now building the capability to go directly to the book publishers and
hold inventory, which should help both margins and service. We expect
the revenue mix to shift over time from just products stocked by Amazon
to more products from stores within the Amazon mall where it receives
lead generation fees. Of course margins from inventory might range from
10%-30% depending upon product category, with rental revenues at near
100% incremental margins. We believe this e-tailing model can work for
Amazon given their large, loyal customer base.
The stock appeared sensitive this week to concerns about other Web
e-tailers using price as a weapon. For example, ONSALE introduced a new
AtCost service to offer computer-related merchandise at wholesale prices
plus a fee of $10 or less. We do not believe this pricing gimmick is a
direct threat to Amazon. Direct competitors, like N2K and CDNow have
been promoting price in competitive desperation since last year and do
not appear to have succeeded in stopping Amazon from continuing to gain
share of the music category. Prospective competitors, like BUY.COM,
want to sell a wider range of products at cost, using third-party
distribution, depending on advertising revenues for the hope of
profits. We wonder if this model can work. We believe consumers will
continue to value aggregators of services, like Amazon, which can
reliably deliver merchandise. We also believe that consumers appreciate
the convenience, familiarity and reliability of Amazon.com and price
alone will not drive consumers to other sites. The company?s Q4
revenues of $250 million demonstrate that.
CONSOLIDATION PACE PICK UP WITH @HOME BUYING EXCITE ? @Home?s (ATHM-$97
3/8) announced plans to buy Excite for approximately $6.7 billion. For
reference, this marks a big industry step-up in absolute dollars over
the $4 billion AOL announced it would pay for Netscape (NSCP-$60 11/16)
in November.
We believe this significantly improves the competitive position for both
Excite and @Home, giving Excite a relatively permanent home, and @Home
the ability to mine Excite?s user base for customers. We believe
@Home?s growth will benefit the industry, as we believe Web audience and
usage growth will be directly boosted by faster access.
@Home?s biggest challenge remains AOL, which still boasts a superior
package of content, commerce and community, in our view. Excite should
help make the @Home offering more attractive. We understand @Home is
open to a partnership with AOL, although each wants to be positioned as
the service provider, controlling billing and the first page. While
@Home does not want to be a dumb pipe, AOL could become premium channel,
although the cut of revenues to AOL would still remain a debate. The
test will be whether or not @Home proves able to displace AOL
customers. We believe it will remain very difficult to entice AOL
members to give up email addresses and the habit of using the AOL brand
of services. For now, @Home is the leader in domestic broadband
Internet access, with over 330,000 subscribers. AOL is just beginning
to find access partners, now including GTE and Bell Atlantic. We expect
further deals will soon be announced. In the end, we expect both AOL
and @Home can succeed.
THE NEXT DEAL? - Relatively high valuations are facilitating
acquisitions. We expect the @Home/Excite deal will force more companies
to pick up the consolidation pace before the musical chairs game stops.
This seems to put the most pressure on Yahoo! to consider larger
acquisitions. We also wonder about Amazon?s appetite. In terms of
sellers, we would look first to Lycos, SportsLine, and Preview Travel.
However, we expect every company is considering appropriate partners
DOUBLECLICK DELIVERS BIG NEWS - DoubleClick reported impressive Q4
revenues of $29.1M compared to our estimate of $24.1M. The bigger
surprise was the announcement of a three-year Advertising Services
Agreement with AltaVista. We are particularly encouraged by this new
agreement, which finally gives us some confidence and visibility on
DoubleClick?s business model. Moreover, it appears that Compaq, which
owns AltaVista is committed to growing its Web business, which should
boost AltaVista?s traffic and enable more business for DoubleClick.
Compaq recently announced plans to purchase Shopping.com, providing the
technology to build a Compaq computer store online that could sell a
bundle of a Compaq computer system and related peripherals. Given
competitive threats from other computer brands selling on-line, we
expect accelerated investment from Compaq.
As a result of these results, we raised our rating on DCLK to a Buy. We
admit we were late on the stock, having been unwilling to take the risk
of the company?s losing the AltaVista business. In addition, the
business model has been changing, but becoming clearer. We believe the
advertising services market will emerge as one of the keys to Web
economic growth, with DoubleClick now more firmly established as a
leading player. We believe it can capture a reasonably significant
percentage of Web advertising and commerce spending.
SPORTSLINE - This week, SportsLine began providing sports news
programming to the AOL Sports Channel, under a previously announced
agreement, which we believe should help boost share. Basketball should
also help traffic. SportsLine hosts michaeljordan.com?s personal Web
site, where traffic has jumped 600% since his retirement was announced.
In addition, SportsLine?s online merchandise sales have soared, with the
top 2 selling items in the past two weeks being Jordan collectibles.
E-Tailing Update ? lauren_cooks_levitan@rsco.com
While Amazon.com remains our top pick of stocks to buy (see our comments
above), we are braced for acts of competitive desperation among the
e-tailers, where we expect companies will use price as a weapon, when
ultimately we believe brand and fulfillment are more important.
ONSALE - ONSALE this week announced a new area called atCost, where it
plans to sell products at fixed wholesale prices with small additional
fees, on a ?cost-plus? basis. TechData will provide the initial supply
of products for atCost, with other sources eventually to follow.
ONSALE?s Q4 computer sales were weak, constrained by supply. We view
the atCost strategy as a bold move to fix the current supply constraint,
but we are not clear if it fixes the company?s ongoing margin
challenge. While we believe the marketing angle of atCost holds some
potential to attract customers, with continued strong competition in its
key categories, we still view ONSALE?s goal of becoming the Costco of
the Web as somewhat elusive. We suspect the logical conclusion may be
that other e-tailers will follow ONSALE?s lead, thereby causing a lack
of differentiation once again.
PREVIEW TRAVEL - Preview?s Q4 was roughly in line with modest
expectations, with transaction revenues below and advertising revenues
above our estimates. We are encouraged by signs in January of an
improving look-to book ratio confirming positive consumer reaction to
changes to the site and service. Unfortunately, the pace does not seem
strong enough yet for us to maintain Q1 estimates, which may cause the
stock to continue to languish. However we continue to believe the
current market capitalization of Preview Travel of $316 million appears
highly attractive relative to the market opportunity and to the cost of
replacing the technology, content, and customer service infrastructure.
We believe Preview can maintain a leading position in the online travel
market, the question is whether or not the business model works better
for advertising or commerce. Preview is showing signs of meeting the
challenge of convincing consumers to both research and book travel
online.
THE BIG PICTURE - The Internet companies appear to be taking mind share
and revenues from existing media and commerce companies, while creating
some additional value through efficiency of the Web. Thus, our
benchmark for valuation remains those non-Internet companies that have
been around long enough to allow calculation of value based on current
earnings.
This week the market capitalization of the 50 companies in
Internet.com?s ISDEX index (excluding Cisco) is approximately $202.9
billion. This compares to the top 20 media companies, which have a
combined market capitalization of approximately $453.9 billion. In the
retail category, Wal-Mart?s market capitalization is approximately
$175.8 billion.
By means of example of how the Web is gaining value at the expense of
other stocks, earlier in the week, Fidelity Investment?s Magellan Fund
replaced Philip Morris? (MO-$46 3/16) stock, from its top 10 holdings in
Q4, with AOL?s stock. AOL is now the 3rd largest holding in the fund, a
position which could be worth $3-$4 billion.
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Rating 1/21 1/14 1-Wk 52-Wk Chg
Chg High 52Wk Hi
1/14- to 1/21
1/21 Price
Amazon AMZN BUY 106 138 -23% 199 1/8 -46.8%
Am.Online AOL SBUY 141 144 * -2% 167 -15.6%
CMG CMGI LTA 90 1/4 105 -14% 155 -41.8%
CNET CNET BUY 83 72 * 14% 108 -23.1%
Dig.River DRIV BUY 37 5/8 40 -6% 61 3/8 -38.7%
Dialog DIALY MP 5 1/4 6 -12% 16 1/4 -67.7%
DbleClick DCLK BUY 98 84 * 16% 114 5/8 -14.6%
Ebay EBAY BUY 181 3/4 225 1/3 -19% 321 -43.4%
E*Trade EGRP BUY 77 3/8 85 * -10% 108 -28.4%
Excite XCIT NR 85 7/8 65 1/8 32% 111 -22.6%
Gemstar GMSTF BUY 57 1/8 61 * -7% 69 5/8 -17.9%
Getty GETY BUY 19 19 * -3% 28 1/4 -32.7%
Lycos LCOS BUY 117 85 * 36% 145 3/8 -19.5%
NetGrav. NETG BUY 19 3/8 20 2/3 -6% 32 1/2 -40.4%
NetSol. NSOL BUY 169 1/4 165 3% 260 3/8 -35.0%
NewsEdge NEWZ MP 11 3/8 13 3/8 -15% 19 3/4 -42.4%
N2K NTKI MP 14 5/8 15 * -4% 34 5/8 -57.8%
Onsale ONSL BUY 42 3/8 49 4/7 -15% 108 -60.8%
PrevTravl PTVL BUY 23 1/4 23 4/9 -1% 44 -47.2%
Infoseek SEEK MP 61 4/7 73 -16% 100 -38.4%
SportsLine
USA SPLN BUY 30 28 * 6% 39 5/8 -24.3%
TicketMaster Online
CitySrch TMCS BUY 55 1/4 62 -11% 80 1/2 -31.4%
Yahoo! YHOO BUY 265 344 -23% 445 -40.4%
Internet Stock
Index ISDEX 330.3 339.83 -2.8% N/A 235.9% (1)
NASDAQ Composite
Index COMQ 2344.72 2276.82 3.0% N/A 49.8% (1)
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(1) Change based on last 12-month's
performance.
Source: AT Financial Information and BRS
Estimates
Rating Definitions: The following are basic definitions for our
recommendation ratings.
Strong Buy ? Rating for a stock, which we believe could have
significant, positive price movement near-term. Therefore, we would be
aggressive buyers of the stock.
Buy ? Rating for a stock, which we recommend buying, however believe
there may not be near-term news or events to move the stock price.
Long-Term Attractive ? Rating for a stock, which we believe could have
long-term value, however we would not necessarily recommend buying.
Market Performer ? Rating for a stock, which we believe will perform at,
or below, market levels.
BancBoston Robertson Stephens maintains a market in the shares of
Amazon.com, CMG Information Services, CNET, Dialog, Digital River,
DoubleClick, Ebay, Inc., E*Trade, Excite, Gemstar, Getty, Infoseek,
Lycos, Microsoft, NetGravity, Netscape, Network Solutions, NewsEdge,
N2K, Onsale, Preview Travel, SportsLine USA, Ticketmaster/CitySearch,
and Yahoo! and has been a managing or comanaging underwriter for or has
privately placed securities of Digital River, Ebay, Inc., E*Trade,
Excite, Onsale, SportsLine USA and Ticketmaster/CitySearch within the
past three years.
FOR ADDITIONAL INFORMATION, PLEASE CALL YOUR BANCBOSTON ROBERTSON
STEPHENS REPRESENTATIVE AT (415) 781-9700.
Unless otherwise noted, prices are as Thursday, January 21, 1999.
The information contained herein is not a complete analysis of every
material fact respecting any company, industry or security. Although
opinions and estimates expressed herein reflect the current judgment of
BancBoston Robertson Stephens, the information upon which such opinions
and estimates are based is not necessarily updated on a regular basis;
when it is, the date of the change in estimate will be noted. In
addition, opinions and estimates are subject to change without notice.
This Report contains forward-looking statements, which involve risks and
uncertainties. Actual results may differ significantly from the results
described in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in
"Investment Risks." BancBoston Robertson Stephens from time to time
performs corporate finance or other services for some companies
described herein and may occasionally possess material, nonpublic
information regarding such companies. This information is not used in
the preparation of the opinions and estimates herein. While the
information contained in this Report and the opinions contained herein
are based on sources believed to be reliable, BancBoston Robertson
Stephens has not independently verified the facts, assumptions and
estimates contained in this Report. Accordingly, no representation or
warranty, express or implied, is made as to, and no reliance should be
placed on, the fairness, accuracy, completeness or correctness of the
information and opinions contained in this Report. BancBoston Robertson
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may have an interest in the securities of the issue(s) described and may
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Copyright * 1999 BancBoston Robertson Stephens Inc. |
