BANCBOSTON ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
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March 5, 1999
The Web Report ? Volume 2, Issue #9
This week, the NETDEX index closed at 706.10, up 1.7% from last week and
up approximately 478.4% over the same period last year. The NETDEX is
down 12.4% from its peak of 806.3 in January. For comparison, the
NASDAQ ended the week up 1.5% from last week, and up 30.3% from the same
date last year.
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 67
companies in the NETDEX index is approximately $263.9 billion. This
compares to the top 20 media companies, which have a combined market
capitalization of approximately $475.0 billion. In the retail category,
Wal-Mart?s market capitalization is approximately $194.3 billion.
WHO WILL GROW INTO BIG VALUATIONS?: We still believe there is an
accelerating shift in economic spending towards the Internet, which will
justify the valuations on a few emerging companies. We continue to focus
on the biggest companies that are moving faster to grow into those
valuations. The best ways to justify valuations will be to race past
estimates, which the leaders have been doing, or use inflated stock
currencies to acquire value through acquisition.
We believe Amazon.com may be running fastest relative to its valuation
today, using this combination. We recently raised our rating to Strong
Buy after the announcement of a deal to invest in Drugstore.com. We
believe the Lycos, TicketMaster CitySearch, USA combination will be
capable of growing into a big valuation. While the stocks look confused
by the terms of the deal, we believe they will recover when the scale is
better appreciated. This week we review Yahoo!, which remains one of
the biggest and perhaps the definitive Web brand.
CMGI SEEMS TO BE EVERYWHERE: We continue to be impressed with the
breadth of CMGI?s venture investments and subsidiaries, and with
management?s strategic clarity. We are starting to see more regular
news out of the company, as investments are reaching IPO stage. Silknet
filed its IPO, and we believe several others are close. We admit to
confusion over what to do with the stock at this level. When we apply
what we believe is a rational approach to estimating the asset value of
the portfolio, valuing the public companies at their trading prices, the
subsidiaries at our best guess, and the venture investments at our best
guess or the valuation on the last financing round, we estimate the
stock is worth $42. When we take a more optimistic stance and give
every company in the portfolio a valuation that reflects a successful
public stock as much as two years out, we estimate CMGI stock could be
worth $150. With CMGI currently at almost $140, our conclusion is that
investors are willing to assume every investment will be a huge winner,
and in typical Internet style are not using the present value function
on their calculators. Our thought is that the stock will continue to
trade at some substantial premium to the current asset value, just like
shares of Berkshire Hathaway. We could feel comfortable owning the
stock at this price with a long-term view, but suspect we will have a
chance to buy it lower if the IPO market cools off.
NETWORK SOLUTIONS DEBATING WITH NEW REGULATORS: We believe ICANN took
an aggressive stance in its White Paper on accreditation guidelines for
new registrars, proposing several regulations and a small tax on
registrars. Even the current guidelines appear to allow NSOL to
continue growing dramatically with minimal competition. Still, NSOL has
publicly reacted to ICANN?s aggressive stance, and entered the meetings
in Singapore this week hoping to reverse some of ICANN?s proposals.
Early indications are that NSOL will be successful in encouraging ICANN
to moderate at least some of its policies. NSOL proposed terms of the
future contract it expects to have with each of the new registrars,
including the first mention of the price it hopes to charge future
registrars for the registry half of the business - $16 per year per
domain name. At a little less than half of the $35 per year NSOL
currently charges for both registrar and registry services, the price
seems like a fair starting point. We expect it to be negotiated with
the Department of Commerce, not ICANN. Timing remains a question, as we
believe one result of the meeting was to push the deadline for ICANN to
accredit new registrars, and out of necessity the deadline for setting
the registry price, from March 31 to April 26. We continue to like
NSOL?s major marketing head start, and believe there is big upside to
our estimates as new registration accelerates and the company layers in
additional services. We would continue to focus on the stock seeing it
off 40% from its recent high of $260.
YAHOO! HOSTS FIRST ANALYST DAY: Yesterday, Yahoo! held its first
analyst meeting. The meeting helped us better appreciate the types of
services that Yahoo! is developing to transform itself from a portal to
a network. With a reach of more than 50 million global users,
international growth is just beginning with Yahoo! developing local
language content and services in more markets. We believe the challenge
is how to capture more time and economic value from each person. The
valuation of $35.5 billion is now about $710 per person, compared to
estimated 1999 revenues of $10.33 per person. This gap illustrates our
challenge with the stock.
Yahoo! has protected its pure, high-margin media business model. The
idea is to enhance the value of content and services from others by
packaging.
Yahoo! has over 35 million registered users, which represent the core of
its audience, and in our opinion, the key to its ability to make more
money through better targeting. We were impressed with the fact that the
company appears to be adding approximately 100,000 registered users per
day. With over 167 million page views per day on average ending
December 1999, people are busy clicking.
Personalization has been sneaking up on us. Services now include email,
instant messaging between friends, calendars, sports scores, stock
portfolio pricing, news feeds, clubs and other forms for updated
communication and information. The technology to integrate this quickly
for tens of millions of people is not trivial and Yahoo! continues to
lead in ease-of-use, in our view. The idea is to make your Web life
more productive. The more Yahoo! is integrated into our daily lives,
the more it will have value.
Yahoo! has already achieved that status of being a global branded
network, providing users guidance on where to find practically anything
on the Web. In addition, Yahoo! allows users to connect to a large
community, an opportunity which is significantly enhanced by its pending
Geocities acquisition. Geocities provides users with a broad
distribution platform for individually built, free home pages. We
believe these individual and business home pages provide information
that can prompt purchases across many categories. We expect the
integration of Geocities will facilitate commerce at Yahoo! by
generating leads to Yahoo!?s partnered stores. We expect the Geocities
acquisition to close in the next 2 to 3 months.
We estimate the combined reach of Yahoo! and Geocities will be about 60
million users, compared to Yahoo!?s stand-alone reach of 50 million
users currently. We believe the challenge will be to maintain two
brands. However in our view, it is easy to differentiate Yahoo!?s
network from Geocities relatively narrow service. We believe the
acquisition pushes Yahoo! towards becoming more of a network than a
portal, offering more community services to keep users spending more
time on its sites.
Yahoo! Shopping seems to be evolving into a first stop to shop, despite
being a bit slower than AOL and Amazon.com. The Yahoo! Shopping brand
does not seem to have the aura of quality that AOL has achieved by using
high rents to screen out weaker tenants. The functional focus seems to
remain price, providing a listing of product availability, highlighting
stores paying rent. The issue with this model is that it does not
differentiate enough by quality of service, in our view. In contrast,
Amazon.com and soon the new Lycos Network with HSN will have a
competitive advantage with strong fulfillment capabilities. We expect
Yahoo! to be more selective over time with the stores that it more
closely integrates into its channels.
With all of its huge traffic volume, Yahoo! is collecting more data
about its customers than it may ever be able to use, but it should be
able to push more targeted commerce offerings, with direct marketing
evolving to be more powerful than having a branded mall. We expect
direct marketing, including opt-in HTML email, to yield positive
surprises for Yahoo! and its commerce partners.
We expect broadband to enhance the quality and efficiency of the service
and of advertising. While we expect some turf battles among access
providers, we expect Yahoo! will take advantage of being an open
network. For registered users, it can allow personalization of the
service by indicating fast or slow access. As many if not most of
Yahoo!?s users have fast access at work, Yahoo! is already a broadband
network.
Will Yahoo! remain independent? Its not obvious to us who could afford
to buy it, although Yahoo! could buy almost anything. It has enough
eyeballs to make the value of buying a media company modest at best. A
merger with Amazon.com might answer some of our commerce concerns, but
would be too difficult to manage. Yahoo!?s neutrality and objectivity
is also a core value it provides to its community.
Does Yahoo! need to buy more content to capture more time and money? It
already packages content from most traditional media companies and the
Web-based media and commerce companies. Its stock and sports channels,
for example, seem to have grown up to be competitive with pure sports
sites. This may be enough.
However, given the company?s compelling stock currency, we expect more
acquisitions of the GeoCities scale will be used to accelerate the
company?s path of defining the growth of the Web.
E-Tailing Update ? mailto:lauren@rsco.com
WHY WORKING THE DATABASE IS GOOD FOR AMAZON AND ITS INVESTORS: This
week some investors seemed spooked by selective promotions Amazon made
via e-mail to selected customers. We think several people concluded
that if Amazon was selectively offering coupons, its only objective must
be to drive Q1 sales with a few weeks remaining in the quarter. This
conclusion is inconsistent with our understanding that different e-mails
were sent to different former customers including some messages which
were simply friendly reminders about Amazon with some recommended
titles. Amazon has shown strong customer retention and high levels of
repeat purchases.
While we have been troubled by the efforts of certain e-tailers that
regularly hold 30%-off sales on their entire product lines, we are not
at all concerned about Amazon?s recent initiatives. In fact, we believe
the company has been selectively testing different customer groups and
different promotional tools all along and we are impressed by the
company?s seemingly increased sophistication in working its large
database. These online initiatives have tended to provide high
conversion rates. We expect Amazon will continue to take advantage of
these proven direct marketing techniques.
EBAY AND AMAZON ? THE STRONG GET STRONGER: We believe that recently
released MediaMetrix data indicate that eBay and Amazon are experiencing
strong continued momentum from the holiday season into Q1. Specifically,
during January, eBay?s unique visitors increased 11.8% to 6.138 million
users versus 5.491 million users during December and average minutes
spent per user surged to 140.2, a 10.7% increase from December. We are
impressed by this sequential increase. We view these continued strong
traffic trends as further indication that eBay is achieving mass-market
status and the company?s marketing initiatives and valuable PR have
accelerated the company?s growth. Additionally, we believe the increase
in usage minutes provides us with an early, but positive indication that
eBay?s new users are becoming just as addicted to the Web site as the
first users who made eBay the predominant person-to-person auction site.
Amazon?s January reach numbers provide us with increased confidence that
Amazon.com is on track to at least achieve the sequential growth assumed
in our Q1 revenue estimate of $260.0 million versus $252.9 million in
Q4:98. We believe the modest sequential decline to 9.033 million unique
visitors from 9.134 million users during December 1998 demonstrates
Amazon?s ability to attract new customers and retain the customers it
gained during Q4. Further, we are impressed that growth in consumer
interest in on-line shopping and Amazon?s leadership in e-tailing
effectively eliminated the normal seasonal downturn in sales posted by
land-based retailers immediately following the holiday season. For
example, land-based retailing giants Wal-Mart (WMT $87 *) and Gap Inc.
(GPS $68 *) posted fairly typical sales declines in January of 50% and
67%, respectively (we note December sales reflect a five-week period
versus a four-week January period). While traffic does not equate
directly to sales (given varying trends in conversion rates and size of
average transaction), we view the traffic results as a good proxy for
the sales potential of an e-tailer. Further evidence of sequential
revenue growth in Q1 coupled with the company?s recent investment in
Drugstore.com point toward Amazon?s evolution into a true e-tail portal.
These factors increase our confidence the company can grow into its
current valuation and are consistent with our Strong Buy rating.
Microsoft ? The E-Commerce Backend: Microsoft made two announcements
this week regarding its e-commerce efforts to create the ultimate
shopping environment. First, the company has acquired CompareNet Inc., a
leading shopping bot with over 1.5 million users per month. Second, the
company is going to target small businesses and manufacturers that want
to establish an e-tailing presence. Through Microsoft?s BizTalk,
companies can more easily integrate their systems and open virtual
storefronts on the Microsoft Network (MSN). We believe the integration
of CompareNet?s technology with Sidewalk and the addition of e-tailing
tenants on MSN is a huge first step towards becoming a major retail
portal and should signal the industry that Microsoft wants to be an
e-tailing player. Ultimately we believe Microsoft?s presence in the
e-tailing space will accelerate consolidation and validates our
long-time contention that e-tailing is not a fad but a new distribution
channel that can not be overlooked.
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Rating 3/04 2/25 1-Wk 52-Wk Chg
Chg High 52Wk Hi
3/04 - to 3/4
2/25 Price
Amazon AMZN SBUY 120 1/8 125 -4% 199 1/8 -39.7%
Am Online AOL SBUY 86 1/4 87 1/5 -1% 91 4/5 -6.1%
CMG CMGI LTA 139 3/8 118 3/8 18% 155 1/3 -10.3%
CNET CNET BUY 139 3/4 113 1/4 23% 154 3/4 -9.7%
Digl River DRIV BUY 32 36 7/8 -13% 61 3/8 -48.0%
DbleClick DCLK BUY 96 4/5 91 6% 114 5/8 -15.5%
Ebay EBAY BUY 130 4/5 299 1/2 -56% 125 4.7%
E*Trade EGRP BUY 46 7/8 46 5/8 1% 66 3/7 -29.4%
Excite XCIT NR 109 98 4/5 10% 125 -12.8%
Gemstar GMST BUY 61 7/8 63 5/8 -3% 69 5/8 -11.1%
Getty GETY BUY 19 7/8 19 3/8 3% 28 1/4 -29.6%
Lycos LCOS BUY 87 3/8 93 -6% 145 3/8 -39.9%
NetGravity NETG BUY 18 1/8 21 1/8 -14% 32 1/2 -44.2%
NetwrkSols NSOL BUY 156 177 -12% 260 3/8 -40.1%
NewsEdge NEWZ MP 9 7/8 10 1/8 -2% 19 3/4 -50.0%
N2K NTKI MP 12 1/2 13 1/8 -5% 34 5/8 -63.9%
Onsale ONSL BUY 31 1/3 36 1/2 -14% 108 -71.0%
Prv Travel PTVL BUY 21 1/8 20 6% 44 -52.0%
Infoseek SEEK MP 68 1/3 74 1/8 -8% 100 -31.7%
SportsLine USA
SPLN BUY 52 5/8 43 5/8 21% 55 3/7 -5.1%
TicketMaster Online CitySearch
TMCS NR 34 3/4 36 1/2 -5% 80 1/2 -56.8%
Yahoo! YHOO BUY 151 1/2 155 3/8 -2% 222 1/2 -31.9%
NETDEX Index
NETDEX 706.10 694.30 1.7% 806.3 -12.4%
KEBDEX Index
KEBDEX 895.80 884.10 1.3% 1,043.1 -14.1%
NASDAQ Composite Index
COMQ 2,292.89 2,326.82 -1.5% N/A 29.8%(1)
(1) Change based on last 12-month's
performance.
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Source: AT Financial Information and BRS Estimates
* BancBoston Robertson Stephens is acting as an advisor in the City
Auction transaction and as a result our rating of this stock
automatically goes to No Rating.
BancBoston Robertson Stephens maintains a market in the shares of
Amazon.com, Cisco Systems, CMG, CNET, Preview Travel, Digital River,
DoubleClick, eBay, E*Trade, Excite, Gemstar, Getty, Infoseek, Lycos,
NetGravity, Network Solutions, NewsEdge, N2K, ONSALE, Preview Travel,
SportsLine, TicketMaster Online-CitySearch, Yahoo! and has been a
managing or comanaging underwriter or has privately placed securities of
Digital River, eBay, E*Trade, Excite, NetGravity, ONSALE, Preview
Travel, TicketMaster Online-CitySearch and SportsLine within the past
three years.
For additional information, call your BancBoston Robertson Stephens
representative at (415) 781-9700.
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, and/or represents
outstanding competitive and business model potential. 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.
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STEPHENS REPRESENTATIVE AT (415) 781-9700.
Unless otherwise noted, prices are as of the close March 4, 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
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described herein and may occasionally possess material, nonpublic
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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
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Copyright * 1999 BancBoston Robertson Stephens Inc. |
