BANCBOSTON ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
keith@rsco.com
September 18, 1998
The Web Report #38
The ISDEX closed at 96.80 on Thursday this week, up 4% from last week's
close of 92.99, and up about 11% from its most recent low of 87.01 on
August 31. The ISDEX is still 45% down from its most recent high in
mid-July. The NASDAQ is up 4% from the end of last week.
We believe it is reasonable to expect some stability in stock prices
over the next month or so. At that stage, we would expect technology
stocks, particularly Internet stocks, to recover and outperform the
averages. The risk in a continued volatile market may be some
tax-related selling, particularly from retail buyers at the summer
peak. We would continue to accumulate a few franchise names, as we
expect investors will be much more picky this round.
THE BIG PICTURE: Accordingly, 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
down considerably over the next year or so. This week the market
capitalization of the 50 companies in the ISDEX index is approximately
$68.0 billion, with total trailing sales of almost $7.1 billion,
suggesting a revenue multiple of 9.6 times. This compares to the top 20
media companies, which have a combined market capitalization of
approximately $363.7 billion, compared to total trailing 12-month
revenues of about $174.1 billion, for a multiple of almost 2.1 times.
Another interesting comparison is that the ISDEX's market cap is almost
half the size of Wal-Mart, whose market capitalization is approximately
$137.1 billion, with trailing 12-month sales of approximately $127.5
billion.
TheWebThirtySomething: As the Web gets older, what is the next Web
topic to attract media focus and become exaggerated out of proportion?
Previously, on the Web channel, valuation had been the number one
topic. Derivatives have included doubts about Internet audience growth,
the debatable value of banner advertising, pricing pressure on
e-tailing, and the binary views regarding competitive battles.
We think there will be further appreciation of accelerating commerce
activity, followed by focus on fewer winners. We expect you to hear the
phrase, "I bought it on the Web" from more friends, family, and
colleagues. We expect to see the media and investment community shift
from talking about big markets to big margins. The most successful
companies on the Internet have already secured large, loyal audiences,
which has allowed them to generate proportionately more advertising and
commerce dollars. We believe more limited access to the public markets
for private companies will put existing public companies in a stronger
competitive position. We are just starting to see the earnings leverage
from these winning models, particularly at AOL and Yahoo!. Among the
emerging franchises, we expect CNET will stand out this quarter in terms
of proving profitability. We expect to be able to raise our estimates
for CNET based on strong initial signs of incremental commerce
revenues.
AOL: AOL remains at the top of our list to accumulate during this
turmoil. We believe AOL is on track to beat our Q1 EPS estimate of
$0.22. While subscriber growth seems seasonally slow, we still expect
net domestic additions to be in a range of 750,000 to 800,000
subscribers. We expect to see a continued increase in subscription,
advertising and commerce revenue per subscriber, which we believe will
enable the company to beat our estimates. We believe AOL continues to
generate more revenue per customer than any other Internet company.
YAHOO!: Yahoo! continues to maintain its leading market share. We
expect to see upside to our September quarter estimates when the company
reports on October 9th. We believe traffic will continue to grow faster
than its competitors. We wouldn't be surprised if sequential growth in
page views approached or exceeded 20%, similar to the June quarter,
although seasonality may keep it down a bit. As we saw last quarter, we
expect the focus will be on improving margins. As such, we have further
confidence in our forecasts and believe there remains considerable
upside to our estimates and price target.
AMAZON.COM: We continue to watch Amazon.com's stock, hoping that retail
tax-related selling might take it down closer to our somewhat
conservative price target. With more than 3.1 million customer
accounts, and repeat customer orders representing 63% of sales, we
believe Amazon.com is well positioned to expand its retail offerings
beyond books and music. We continue to believe other businesses could
further leverage the company's infrastructure investments. The leverage
on an incremental 5 or 10 million people and/or another $20 in revenue
per person can provide geometric EPS increases in a few years. While
the current quarter should be another solid positive surprise, we don't
expect to raise our estimates enough to bring our price target to the
current level. However, we believe there is enough belief in the
company's ability to grow exponentially that the stock may wait
impatiently for the numbers to catch up. As such, we're more holders,
than aggressive buyers of Amazon.com, preferring to accumulate more AOL
first, and Yahoo! second, for now.
OTHER INTERNET STOCKS NEWS THIS WEEK*
This week, we added two new Internet companies to our growing list of
stocks under coverage.
THE DIALOG CORPORATION: We initiated coverage of The Dialog
Corporation, a leading online information provider, formed by the merger
of Knight-Ridder Information Inc. and M.A.I.D plc. Dialog has a
combined database of over 6 billion pages of text and 3 million images,
or over 50 times the information found on the Web. Dialog currently has
around 20,000 corporate customers, including over 50% of the Fortune 500
companies, with 100% penetration of electronics, pharmaceuticals,
aerospace, cosmetics and brokerage companies and 88% of the high-tech
companies. The challenge is to make this data more assessable outside
of corporate libraries. We believe a significant opportunity exists for
Dialog to accelerate its historical 10% pro forma growth, through
successfully upselling existing accounts, and/or leveraging the Web with
its proprietary indexing software, InfoSort, as a broader platform for
additional e-commerce opportunities. We initiated coverage with a
Long-Term Attractive rating. We would like to see a quarter or two of
growth for the combined company and see how Dialog manages its new
efforts to move into the e-commerce market. We expect the September
quarter to be basically flat, in terms of revenue growth, but up in
terms of earnings, as operating expenses for the combined company
improve. We believe we will begin to see real revenue momentum build by
Q4. Our price target of $20 is based on a multiple of 20x our F1999 EPS
estimate of $1.00.
DOUBLECLICK: We also initiated coverage of DoubleClick, a company which
provides outsourcing solutions to Internet advertisers and Web
publishers. DoubleClick's salesforce sells ads for 230 Web sites,
including AltaVista, The Dilbert Zone, MindSpring, Macromedia and U.S.
News and World Report. DoubleClick's DART technology serves ad banners
and offers targeting software on a pay-per-click basis. There is some
risk to the Alta Vista contract, which we believe may already be
reflected in the stock. DART has over 98 worldwide customers, including
NBC, The Wall Street Journal Interactive, RealNetworks and The Sporting
News. We believe DoubleClick can become the outsourced backend of the
targeted Web advertising/commerce business. We believe DoubleClick's
services encourage advertisers to spend more on the Web as well as help
merchants improve their e-commerce results. Our price target of $20 is
based on a 50 multiple of C2001 EPS of $0.40. We initiated coverage
with a Long-Term Attractive rating as we look for the business model mix
to stabilize. Long-term, we believe DoubleClick could emerge as one of
the proxies for Web growth.
SPORTSLINE: We are encouraged by the positive move in the stock this
week as investors appear more willing to look towards the improving
elements of the story, including the possibility of an imminent
announcement with AOL. We believe SportsLine's business remains strong,
in terms of both traffic and advertising revenue. As such, we expect
there could be some upside to our Septebmer quarter expectations, which
the company plans to report on October 20th. It appears as though CBS
promotion of SportsLine is strong during NFL games, with traffic on the
first two Sundays of the season surpassing peak times last year. We
continue to believe there is room for multiple competitors in the sports
category on the Internet. Still, we believe that SportsLine has the
opportunity to emerge as the leader, although it is currently roughly
tied or slightly behind ESPN, by our estimates.
Rating 9/17 9/10 1-Wk 52-Wk Chg Price
Chg High 52Wk Hi Target
9/10- to 9/17
9/17 Price
Amazon AMZN BUY 77 79 5/8 -3% $147 -47.6% $46
Am.Online AOL SBUY 97 1/2 95 7/8 2% $140 1/2 -30.6% $124
CNET CNWK SBUY 32 3/4 36 7/8 -11% $74 1/2 -56.0% $68
Dig. River DRIV BUY 7 1/2 6 25% $13 1/4 -43.4% $15
Dialog DIALYLTA 12 3/4 12 6% $16 1/4 -21.5% $20
DblClick DCLK LTA 21 1/8 21 3/4 -3% $77 1/8 -72.6% $20
E*Trade EGRP SBUY 18 4/7 19 1/3 -4% $47 7/8 -61.2% $51
Excite XCIT BUY 26 1/4 28 1/4 -7% $55 1/2 -52.7% $46
Getty GETY SBUY 17 5/8 14 7/8 18% $28 1/4 -37.6% $40
Lycos LCOS BUY 24 4/9 26 4/7 -8% $53 5/8 -54.4% $44
NetGravity NETG BUY 10 1/5 9 4/9 8% $32 1/2 -68.7% $38
NewsEdge NEWZ LTA 7 4/7 7 1/2 1% $19 3/4 -61.7% $18
N2K NTKI LTA 9 1/4 7 7/8 17% $34 5/8 -73.3% $18
Onsale ONSL BUY 18 3/8 17 7/8 3% $36 4/5 -50.1% $51
Prv.Travel PTVL BUY 18 1/4 14 7/8 23% $44 -58.5% $43
Infoseek SEEK LTA 20 1/2 20 7/8 -2% $45 -54.4% $30
SportsLine SPLN SBUY 18 4/9 13 42% $39 5/8 -53.5% $61
Yahoo! YHOO BUY 90 79 7/8 13% $103 3/4 -13.2% $64
Internet Stock
Index ISDEX $ 96.80 $ 92.99 4.1% N/A -9.0%(1) N/A
NASDAQ Composite
Index COMQ $1646.25 $1585.33 3.8% N/A -1.2%(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, CNET, Digital River, E*Trade, Excite, Getty, Lycos, NetGravity,
NewsEdge,N2K, Onsale, Preview Travel, Infoseek, 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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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
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Copyright * 1998 BancBoston Robertson Stephens Inc. |
