BANCBOSTON ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
keith_benjamin@rsco.com
October 23, 1998
The Web Report #43
A DEAD CAT BOUNCE OR A REAL RECOVERY? - The ISDEX index closed at
149.85, up 12.3% from the end of last week. It is up approximately 30%
from the same period last year. The NASDAQ is up 5.7% from the end of
last week and practically flat compared to the same date last year.
We are encouraged by this uptick, particularly in some of the smaller
stocks, which were hit the hardest and did not recover recently with the
big three, AOL, Yahoo, and Amazon.com. However, we remain concerned
that the overall market, including Internet, technology, and more mature
stocks may not be ready for a sustained recovery. We expect companies
and analysts may still need to reset expectations downward a bit after
December quarter results. As such, we expect few stocks will be able to
react positively short-term, suggesting we remain patient accumulating
our strongest recommendations.
WE REMAIN FINICKY - While we expect Internet advertising and commerce
will demonstrate growth even if the overall economic pace slows, we
expect the leaders to greatly outpace the laggards. We also believe
investors will grow more selective and stick with the most liquid stocks
demonstrating profitability now, creating attractive entry points.
Looking to next week, we would continue being relatively aggressive
buyers of AOL and CNET. Both are leaders, both are profitable, and both
can demonstrate upside versus estimates, in our opinion.
THE LION KING - AOL - AOL reports its first fiscal quarter next Tuesday,
October 27. We expect EPS may reach or exceed $0.25, compared to our
estimate of $0.23. We expect positive surprises are possible on almost
every metric, from subscriber growth to margins. While the stock is now
11% off its all-time high, we believe numbers and strategic news could
be big enough to move the stock, even in this market.
The swing factor for the stock over the next few months could be news of
broadband deals that demonstrate the value of the AOL brand and its
economic leverage on a faster and potentially more profitable Internet.
Time Warner indicated this week that it is in talks with AOL. While we
believe Time Warner supplying broadband access to AOL could be ideal, it
is difficult to access the probability of something being signed soon.
However, we remain confident that a deal will be signed with at least
one cable or telephone company by the end of the December quarter.
THE TIGER - CNET - CNET reports its Q3 on Monday, October 26. We are
looking for publishing revenues of $12.2 M, television revenues of $1.8
M, and operating earnings, excluding one-time items of $0.13 per share.
We have heard concerns regarding the quarter, given the company's
history of not quite making the numbers. We have a high level of
confidence that the company will report numbers at least in-line with
estimates, although we expect more upside in the December quarter and
forward.
There also seems to be fears regarding Web advertising spending by
technology companies. We have seen a dramatic share shift from print
advertising to Web advertising, as IT professionals and consumers use
CNET, ZDNET and other sites as primary sources of information. We
expect more of CNET's revenue and earnings upside will be based on new
payments for lead generation on COMPUTERS.COM and SHOPPERS.COM.
REPORTING SEASON UPDATE: Two relatively new and smaller stocks, Digital
River and NetGravity reported reasonably strong quarters, but have not
yet managed to attract much attention by investors. We believe both
represent leaders in attractive market segments and will prove
profitable long-term. SportsLine recovered a bit from its preannounced
disappointment. As discussed below, we expect it may take until Q1 to
see enough positive news to boost the stock further, however.
DIGITAL RIVER - RUNNING FAST: Digital River reported Q3 revenues of
$5.8 million, significantly above our estimate of $4.2 million. Losses
were $0.26 per share, roughly in line. The company continues to lead
the Electronic Software Delivery (ESD) market, which we believe will
emerge as one of the most logical e-tailing and e-business
applications. Digital River provides outsourcing services for
publishers and e-tailers. We expect growth to be a function of new
clients and more volume through those clients as revenues shift from the
real retail world to the digital retail world. The company ended Q3 with
2,071 clients, including 1,309 publishers and 762 retailers. Digital
River added more than 8,000 products, bringing the library to 131,000
total products, including 24,000 software applications. The company has
served some 214,000 unique customers to date. We view this growing
database as one of the company's key assets. We believe Digital River's
business model has considerable leverage long-term. Our price target of
$15 is based on a 50 multiple of our C2002 EPS estimate of $0.30.
NETGRAVITY - ON TARGET: NetGravity reported Q3:98 revenues up 76% to
$3.1 million, and a loss of $0.22 per share, solidly in line with
expectations. We expect continued growth in Web advertising, however
believe there may be a bit less upside to estimates for 1999.
Therefore, we believe the company's targeting functionality will become
more critical to any site trying to attract advertisers. Fitting with
this theme, NetGravity recently announced its Global Profile Service
(GPS), which combines the company's software with the databases of
MatchLogic, which provides demographic information about users, and
Aptex, which provides behavioral profiles of users. The idea is to be
able to match any visitor, first-time or returning, to a profile that
would facilitate targeting. The theory is that targeting can justify
higher CPMs and increase sell-through rates. We believe targeting is
critical to justifying growth in Web advertising and that NetGravity is
well positioned with its base of software customers to earn a share of
the value created by targeting. Based on a 50 multiple of our F2001 EPS
estimate of $0.75, we have a long-term price target of $37.50.
SPORTSLINE - SACKED BUT STILL FIGHTING: SportsLine reported Q3 revenues
and losses basically in line with expectations set when the company
pre-announced results earlier in the month. Upon reflection, we believe
the shortfall to earlier expectations was due to a lack of cross-selling
of SportsLine ad inventory on the part of CBS and traffic growth that
was slower than SportsLine's peers. We understand that SportsLine
management is taking active measures to ensure the CBS sales team is
focused on cross-selling Internet inventory along with a mix of
television, radio, and other media. Q3 traffic was seasonally flat,
ending September at 6.3 million average page views per day. We believe
a poorly rated NFL television season may have reduced traffic growth at
SportsLine by reducing the effectiveness of CBS on-air promotion of the
SportsLine site and by decreasing the number of people watching the
games in the first place. We suspect television viewers have also been
distracted by scandals and baseball. Earlier in the week, SportsLine
and Excite entered a multiyear agreement, under which SportsLine will be
the exclusive sports content provider on a new enhanced Excite Sports
Channel, which will be launched in Q4. SportsLine is guaranteed minimum
payments under the deal. Further, SportsLine recently expanded its AOL
partnership. By Q1, we believe SportsLine can see improved traffic and
revenue growth with the help of CBS, Excite, and AOL. In the meantime,
we may be stuck in the huddle for a few months.
E-Tailing Update - lauren_cooks_levitan@rsco.com
CONFERENCE UPDATE - DINOSAURS AND BABIES: We continue to compare and
contrast the established retail brands and the upstart e-tailing
brands. At our Consumer Conference last week, we hosted over 100 "real"
retailers and 4 e-tailers, eBay, OnSale, Preview Travel, and Virtual
Vineyards. We believe the Web-grown brands are winning, although we
expect it will still cost many millions and take many years for these
newcomers to build lasting brand power.
EBAY - PURRING: This week we initiated coverage of eBay, the definitive
person-to-person online trading site. Our very enthusiastic
recommendation of the company reflects the company's dramatic growth to
date that has been fueled largely by strong user referrals and the
monstrous market served by the site (approximately $100 billion in the
U.S. alone). Its loyal users appear to LOVE eBay. With the company
ramping up their advertising efforts, we suspect revenue growth could
come even more quickly than our estimates. In our universe, eBay stands
out as having been profitable from its beginning. Its business model
involves charging listing and completion fees. As it leaves payment and
exchange of goods to the users, eBay has essentially no inventory risk.
We expect there will be considerable upside to our estimates and the
stock. Our current price target of $50 is based on estimated 2002E EPS
of $1.00.
ONSALE - CHANGING ITS SPOTS: ONSALE reported Q3 gross revenues of $63.3
million and net revenues of $57.8 million above our estimates of $60.1
million and $45.8 million respectively. The company reported a net
earnings loss in line at $0.17 per share. While we were encouraged by
stronger than expected revenues, we are concerned by continued margin
pressure. Based on Q3 margin results, we are concluding that the pace
of transition to higher margin revenue streams will be pushed out by two
to three quarters. In addition, we have yet to see the impact of
advertising revenues from Yahoo! Auctions, which we believe will have a
difficult task competing with eBay. Until then, we believe ONSALE's
stock may trade sideways for a time. As such, we reduced our rating
from Buy to Long-Term Attractive and adjusted our price target downward
to $35 from $45, reflecting our new 2001 estimate of $0.70. We look to
gain visibility on improving margin trends as the company evolves its
business model from a pure auction site to a value-focused retailer with
multiple selling formats as an opportunity to upwardly revise our
estimates and rating.
PREVIEW TRAVEL - TURNING DAYDREAMERS INTO DAYTRIPPERS: Preview Travel
reported Q3 revenue of $5.6 million and a loss of $0.35 per share, above
our estimates of $5.2 million and a loss of $0.38 per share. The
company demonstrated progress in many aspects of their business model
including impressive increases in advertising revenues and non-air line
related commissions. In addition, the company announced the divestiture
of their television division, a move we applaud as it should enable the
company to focus entirely on the large on-line travel opportunity. We
note the company will still have access to the television group's wealth
of travel-related content, which may eventually have more value in a
broadband world. The company is expected to re-launch their site on
November 8, which we expect can further drive improvements in the
look-to-book ratio, yielding more rapid revenue growth and margin
improvements. We continue to find the stock attractive long-term, based
on Preview's leading position in the on-line travel market, which we
believe can become larger as consumers become more comfortable booking
travel online.
THE BIG PICTURE: We continue to believe the market capitalization
levels for the group make sense relative to the economic opportunity,
although we expect the number of competitors will narrow considerably
over the next year or so. This week the market capitalization of the 50
companies in the ISDEX index is approximately $173.4 billion, with total
trailing sales of almost $16.3 billion, suggesting a revenue multiple of
11 times. Unfortunately, the index now includes Cisco, with a current
market capitalization of 91.3 billion, with sales of $8.5 billion. If
we remove it, total sales would be $82.1 billion, with total trailing
revenues of $7.8 billion, or 10.5 times. This compares to the top 20
media companies, which have a combined market capitalization of
approximately $368.6 billion, compared to total trailing 12-month
revenues of about $173 billion, for a multiple of almost 2.1 times.
Rating 10/22 10/15 1-Wk 52-Wk Chg Price
Chg High 52Wk Hi Target
10/15- to 10/22
10/22 Price
Amazon AMZN BUY 114 2/3 97 18% 147 -22.0% 70
Am.Online AOL SBUY 114 105 2/3 8% 140 1/2 -18.9% 124
CMG CMGI LTA 52 1/4 46 3/8 13% 91 3/4 -43.1% 46
CNET CNWK BUY 39 1/2 31 4/7 25% 74 1/2 -47.0% 68
Dig.River DRIV BUY 8 7 4/9 7% 13 1/4 -39.6% 15
Dialog DIALY MP 10 3/8 10 3/8 0% 16 1/4 -36.2% 20
Dbl.Click DCLK MP 24 3/8 18 1/5 34% 77 1/8 -68.4% 20
Ebay EBAY BUY 51 4/7 32 5/8 58% 54 1/4 -5.0% 50
E*Trade EGRP BUY 17 14 1/5 20% 38 -55.2% 42
Excite XCIT BUY 32 4/7 32 3/4 -1% 55 1/2 -41.3% 46
Gemstar GMSFT BUY 46 1/2 45 4/7 2% 48 1/4 -3.6% 70
Getty GETY BUY 14 9 1/4 52% 28 1/4 -50.2% 40
Lycos LCOS BUY 33 1/5 30 1/4 10% 53 5/8 -38.1% 44
NetGravity NETG BUY 9 7 28% 32 1/2 -72.5% 38
Network
Solutions NSOL BUY 42 3/4 29 3/4 44% 58 -26.3% 86
NewsEdge NEWZ MP 7 5 1/8 37% 19 3/4 -64.6% 12
N2K NTKI MP 5 1/2 5 5/8 -2% 34 5/8 -84.1% 13
Onsale ONSL BUY 15 4/5 14 1/2 9% 36 4/5 -57.0% 38
Prv.Travel PTVL BUY 12 1/4 13 7/8 -12% 44 -72.2% 66
Infoseek SEEK MP 24 3/8 21 1/8 15% 45 -45.8% 30
SportsLine
USA SPLN BUY 11 4/5 9 1/4 28% 39 5/8 -70.2% 60
Yahoo! YHOO BUY 122 1/8 119 3/8 2% 134 5/8 -9.3% 67
Internet Stock
Index ISDEX 149.85 133.45 12.3% N/A 29.9%(1) N/A
NASDAQ Composite
Index COMQ 1702.64 1611.01 5.7% N/A -0.3%(1) N/A
To improve the alignment of the table:
1. Highlight the data.
2. Go to the Format menu and choose "Font"
3. Choose "Courier" and press "OK".
(1) Change based on last 12-month's performance.
Source: AT Financial and BancBoston Robertson Stephens estimates.
ISDEX, The Internet Stock Index, is a trademark owned by Mecklermedia
(NASDAQ:MECK), used by permission.
BancBoston Robertson Stephens maintains a market in the shares of
Amazon.com, CMG Information Services, CNET, Dialog, Digital River,
DoubleClick, E*Trade, Excite, Gemstar, Getty, Infoseek, Lycos,
Microsoft, NetGravity, Netscape, Network Solutions, NewsEdge, N2K,
Onsale, Preview Travel, SportsLine USA, Yahoo! and has been a managing
or comanaging underwriter for or has privately placed securities of
Digital River, E*Trade, Excite, Onsale, and SportsLine USA within the
past three years.
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STEPHENS REPRESENTATIVE AT (415) 781-9700.
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
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Copyright * 1998 BancBoston Robertson Stephens Inc. |
