BANCBOSTON ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
keith_benjamin@rsco.com
November 6, 1998
The Web Report #45
BUYING STOCKS BECAUSE THEY'RE GOING UP: This week, the ISDEX index
closed at 180.38, up 10.4% from the end of last week, and up
approximately 80.4% over the same period last year. For comparison, the
NASDAQ ended the week up 4.5% over last week and up 49.5% from the same
date last year.
We are encouraged and not surprised to see some of the smaller stocks
work this week. Each day's run-up seemed to be followed by profit
taking the next day, suggesting minimal conviction in a sustained
rally. Our hearts remain loyal to a few favorites, starting with AOL,
where we continue to be comfortable with both short and long-term
risk/reward stock profile.
In the next few weeks before Thanksgiving, we expect continued strength
in stocks, particularly among the smaller stocks, with investors looking
for value. The challenge among the Internet stocks is that relative
value is difficult to defend, with the exception of a few stocks that
have substantial cash hoards from recent stock offerings. E*Trade falls
into this category, struggling with its marketing campaign somewhat
muted by market conditions stunning retail investors. The stock has
bounced back somewhat with the market averages. A stock falling to lows
is less of a catalyst for a stock to rebound where investors are more
concerned about competitive position and business model. CNET and
SportsLine continue to run slightly ahead and slightly behind respective
competitors. CNET has built its brand early, with modest costs, and now
has a profitable business model. SportsLine has been much more
aggressive on brand building, layering on marketing costs, including
giving up equity to various partners. While our longer-term views on
these three stocks remain positive, we do not see compelling near-term
catalysts.
STRANGE NAMES: Among the recovering smaller stocks, strange names may
serve as a warning signal. In the 50s, we saw the "-tronics" boom that
bid up the stock of any company with a name that implied a spot in the
burgeoning electronics industry. We wonder if we are seeing part two of
this phenomenon with, Beyond.com and Reinvent. Call us crazy, but we
thought Software.net and US Web, respectively, worked just fine.
As the rally continues in our recommended names, where might we take
profits? Generally, we'd remain cautious on the less proven companies.
With the big 3, AOL, Yahoo! and Amazon.com, we wonder where the economic
power will shift long term. We believe time spent may give us the
strongest measure of value to customers. AOL packages everything from
access to e-mail to content to commerce and is your first and last stop
every day online. Yahoo! has made headway getting over 25 million
people to register and reuse various services, notably for stock
quotes. However, it captures minutes per day of time in the office,
including checking personal e-mail. Amazon.com is replacing the
luncheon shopping break and has become a mall-like destination. We
wonder if Yahoo! loses share of time relative to AOL or Amazon.com. Our
Buy rating on Yahoo! reflects our belief that there will be more than
enough time to go around. However, we would rank AOL first and
Amazon.com second in our time scale.
PICKING WINNERS AMONG THE SMALLER STOCKS: Among the smaller stocks,
there are a few where perceptions may change during the next quarter or
so.
CMGI - AN IPO BAROMETER: We would not be surprised if the market
embraces an Internet IPO or two before year-end, pointing the way
towards a renewed interest in Internet deals in the first quarter. This
could benefit CMG, which invests in private companies, hoping to realize
incremental value through public offerings. Absent the IPO mark-up, we
estimate CMG's asset value is approximately $55 per share. With better
market conditions, CMG has several companies in its portfolio that
could be ready for initiation in the public markets in 1999. Some of
the candidates include Silknet Software, SalesLink, NaviNet, Chemdex,
Engage, and Planet Direct. Successful IPOs of some of these companies
could provide liquidity and increase the value of CMG's ownership in
each.
NETGRAVITY - TARGETING EMERGING AS 1999 ADVERTISING THEME: NetGravity
stock has languished somewhat despite a positive quarter, several new
customer adds, and a strategically important new product announcement.
There remains some competitive confusion regarding DoubleClick, which we
hope will become clearer over the next few quarters, with multiple
catalysts. We believe there is room for multiple competitors, each with
different approaches. We think NetGravity's model allows sufficient
flexibility to allow it to provide customer sites with the ability to
serve advertisements on a targeted basis. NetGravity's current customer
base consists of medium to larger sites, which we believe will continue
to thrive at the expense of the smaller sites. If the company can sign
up one of the super sites like Yahoo, Amazon, or Excite, not only would
it validate the scalability of its products but would hopefully provide
a boost for the stock. Its primary model has been to sell software,
where we estimate it has the leading market share. It is now just
starting to market AdCenter, an outsourced ad management service, which
makes sense for smaller sites to effectively monetize their traffic.
IBM is helping to sell this service, with customer announcements
potentially providing yet another stock catalyst. The next level of
service will be to provide a pooled database of information regarding
individuals exposed to advertising. The business model is to charge a
few cents per advertisement served using the database, called Global
Profiling Service. The company already has teamed up with MatchLogic
for online data and Aptex for offline, credit card purchase history
data. Further announcements of other databases are possible. We
believe NetGravity could emerge as the standard setter as more
advertisers seek to use targeting tools.
MICROSOFT BUYS LINKEXCHANGE: There may be some confusion regarding
competition in the advertising serving and targeting space with the
announcement Microsoft acquired LinkExchange for approximately $250
million in stock. We do not view this as a threat to NetGravity or
DoubleClick. LinkExchange aggregates excess ad inventory on various
sites, ranging from large to small. It keeps part of the inventory to
sell itself and then uses the rest of the inventory to barter banners
between sites. We estimate LinkExchange's Banner Network, the company's
flagship product, includes more than 400,000 sites, reaching more than
21 million consumers. LinkExchange has been adding new services to
upsell to its sites. The integration of the LinkExchange network into
the Microsoft network should help improve its reach into smaller sites.
It marks another step to building a critical mass of services for Web
sites. However, we view its Web businesses as almost a rounding error
relative to its core software business, which remains the blood of the
Internet and for which profits should continue to flow.
E-Tailing Update - lauren_cooks_levitan@rsco.com
Maybe holiday shopping online will keep interest high in the group,
particularly stocks like Amazon.com and eBay, in our view. However, we
are cautious about retailing in the real world.
On Thursday, many retailers reported solid gains in October comp store
sales. Despite this round of news and the (we think overly) optimistic
projections of a retail industry study which concluded that 1998 holiday
sales will increase 5-6%, we continue to believe the approaching holiday
season will be both highly competitive and highly promotional. Consumer
confidence is still high, but has eroded consistently over the last 4
months. For the last several months, department stores, the primary
drivers of mall traffic, have posted lackluster sales results, while
discounters have fared much better.
To us, this separation indicates consumers are more focused on value
than ever. We think this value focus could help e-tailers since most
consumers still believe they can get better prices from online
merchants. Brick-and-mortar retailers have also been helping e-tailers
by, in effect, training consumers to wait until the last minute to shop,
after deep markdowns have already been taken. This makes e-tailers a
great choice for last-minute gift giving. E-tailers simplify matters by
identifying products that are available for quick fulfillment and the
buyer doesn't need to worry about shipping.
Finally, we have observed a major ramp up in real world retailers
highlighting their online offerings. For example, the store windows of
The Gap near our office are directing customers to the company's online
store with signs reading "Surf.Shop.Ship." and TV spots for the
retailing giant are also plugging the Web site. Our hunch is that these
efforts from respected, known brands like the Gap should get more
consumers comfortable with online shopping. Ultimately, shouldn't the
pure play e-tailers benefit disproportionately from increased consumer
comfort with online shopping? We think so.
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 $205.9 billion, with total
trailing sales of almost $16.9 billion suggesting a revenue multiple of
12 times. This compares to the top 20 media companies, which have a
combined market capitalization of approximately $370.6 billion, compared
to total trailing 12-month revenues of about $173.8 billion, for a
multiple of almost 2.1 times.
Rating 11/5 10/30 1-Wk 52-Wk Chg Price
Chg High 52Wk Hi Target
10/30- to 11/5
11/5 Price
Amazon AMZN BUY 128 1/2 126 1/2 2% 147 -12.6% $75
Am.Online AOL SBUY 139 1/2 128 1/3 9% 140 1/2 -0.7% $130
CMG CMGI LTA 73 1/2 57 3/4 27% 91 3/4 -19.9% $46
CNET CNWK BUY 41 4/7 40 4% 74 1/2 -44.2% $68
Dig.River DRIV BUY 11 10 3/4 2% 13 1/4 -17.0% $15
Dialog DIALY MP 10 1/8 10 3/8 -2% 16 1/4 -37.7% $20
Dbl.Click DCLK MP 35 1/4 30 18% 77 1/8 -54.3% $20
Ebay EBAY BUY 81 1/5 79 7/8 2% 90 4/5 -10.6% $57
E*Trade EGRP BUY 21 17 1/2 20% 35 1/4 -40.4% $42
Excite XCIT BUY 39 40 -2% 55 1/2 -29.6% $46
Gemstar GMSFT BUY 58 1/8 54 1/2 7% 59 5/8 -2.5% $70
Getty GETY BUY 12 3/4 11 3/8 12% 28 1/4 -54.9% $40
Lycos LCOS BUY 46 7/8 43 9% 53 5/8 -12.6% $44
NetGravityNETG BUY 11 3/8 9 5/8 18% 32 1/2 -65.0% $38
Network
Solutions NSOL BUY 67 7/8 51 33% 70 1/2 -3.7% $90
NewsEdge NEWZ MP 7 5/8 7 1/2 2% 19 3/4 -61.4% $12
N2K NTKI MP 5 4/5 5 16% 34 5/8 -83.2% $5
Onsale ONSL BUY 15 4/9 17 4/5 -13% 36 4/5 -58.1% $38
Prv.TravelPTVL BUY 14 1/8 13 1/2 5% 44 -67.9% $66
Infoseek SEEK MP 32 33 1/5 -4% 45 -29.0% $30
SportsLine
USA SPLN BUY 17 1/8 14 22% 39 5/8 -56.8% $60
Yahoo! YHOO BUY 151 2/3 131 1/5 16% 151 1/2 0.1% $67
Internet Stock
Index ISDEX 180.38 163.44 10.4% N/A 80.4%(1) N/A
NASDAQ Composite
Index COMQ 1837.1 1757.19 4.5% N/A 49.5%(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. Unless otherwise noted, prices are as of the close
November 5, 1998.
FOR ADDITIONAL INFORMATION, PLEASE CALL YOUR BANCBOSTON ROBERTSON
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
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
Stephens, its managing directors, its affiliates, and/or its employees
may have an interest in the securities of the issue(s) described and may
make purchases or sales while this report is in circulation. BancBoston
Robertson Stephens International Ltd. is regulated by the Securities and
Futures Authority in the United Kingdom. This publication is not meant
for private customers.
The securities discussed herein are not FDIC insured, are not deposits
or other obligations or guarantees of BankBoston N.A., and are subject
to investment risk, including possible loss of any principal amount
invested.
Copyright * 1998 BancBoston Robertson Stephens Inc. |
