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"BANCBOSTON ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
keith@rsco.com
September 4, 1998
The Web Report #36
UNDERWATER BUT STILL BUOYANT: Sharp market corrections are always
marked by self-doubt. Why didn?t I sell before this happened? For the stocks we
recommend and/or own, it is easy to feel that we may have missed something. We
do not believe anything material has changed for the Internet companies.
We remain confident regarding near-term prospects for traffic, advertising, and
commerce growth, particularly as we exit the seasonally slower summer. We
expect the fall will be full of your colleagues, friends, and family talking about what
they bought for you on the Internet. In some respects, one could argue that
valuation levels are just as difficult to rationalize relative to current revenues and
earnings for most of these stocks today, as they were a week ago at much higher
levels. Particularly if economic conditions slow somewhat, we believe investors
will pay a premium for growth. We believe the drivers to Internet growth remain
compelling, with business models potentially allowing for well above average
returns on investment after the initial years of brand building. Looking longer-term,
we remain convinced that the leaders will be able to reach much higher levels of
earnings than may seem obvious today, which should enable much higher stock
prices. The difference going forward is that we expect the competitive battles to
become clearer sooner, leaving room for fewer stocks. As such, we would
continue to focus on accumulating more stock of the leaders, like AOL, Yahoo! and
Amazon. During times of drastic swings in prices, it is important to remember past
volatility. With AOL, for example, there were multiple times when the stock had
fallen 50%, which could have provided an excuse to give up on the stock. To put
this in perspective, AOL?s stock price has risen approximately 11949% from its
March 1992 IPO price of $11.50 per share. Next year, I believe we will be able to
look at this drop as a smaller percentage of a larger gain for the category winners.
ISDEX REBOUNDS 10%: On August 31, the ISDEX fell to 87.01, down 48% from its
most recent high of approximately 170 in mid-July. That was still higher than its
historic low of 70.08 at the end of April 1997. The NASDAQ fell around 25% during
the same time. As of September 3, the ISDEX gained back 10% from this recent
low, while the NASDAQ gained only about 5% during the same period. The ISDEX
is up 2.7% over last year, compared to the NASDAQ, which is down 3%. While we
do not want to deny the risk of continued stock volatility, we do not see material
downside risk from here. The ramifications of Russia and Japan will certainly have
some real impact, but we don?t see the degree significantly dampening the U.S.
economy. Interest rates are also not high enough to entice me to shift my mutual
fund and other investments from equity to debt. The best case, in our view, would
be for some stock price stability for a few months. With many institutional investors
returning from summer vacations next week, we believe we could see a recovery in
many stocks, particularly those with above average growth, with the Internet stocks
at the top of that list. The counter argument is that the Web stocks have been too
volatile and will continue to scare some investors away. For retail investors, if
these stocks do not recover, there is a risk of tax-related selling as we approach
year?s end. We think these fears will lead to greater selectivity, allowing stock price
appreciation for selected companies near-term.
WEB NEWS FLOW SHOULD CONTINUE TO PROVIDE POSITIVE CATALYSTS:
We look to category leaders with potential positive news in September and
October. Among the top tier, we expect more announcements from AOL than
Yahoo! or Amazon.com. However, Yahoo! could make some more commerce
deals and Amazon.com could announce its next product category. We expect
strong quarters for all three. In the next tier, CNET should unveil its commerce
auction winners very soon. E*Trade launches its Destination E*Trade next week.
SPORTSLINE ADDS NEW TV SHOW: The company continues to step up its
competitive pace with the introduction of a new weekly football show, FOOTBALL
PLAYBOOK, providing in-depth, pre-game analysis by legendary NFL coaches
Marv Levy and Sam Wyche. The * hour show will be aired in 70 major markets on
Sunday?s during the season. While we estimate this will cost approximately $2
million over the next 3 quarters, we believe the show can help draw significant
audiences to the site. Moreover, it demonstrates the company?s commitment to
creating original content to differentiate its brand and its service. Combined with
football promotion from CBS this fall, we expect SportsLine will be able to secure its
position among the top two sports sites. We believe the race remains between
SportsLine and ESPN, although CNN/SI has a good service and Fox continues to
make an effort with its site. However, access to the larger sports television
audiences of CBS and ESPN appear the swing factor in terms of online market
share.
The question remains whether or not it can pull away from ESPN. Looking at the
core network, the two are now roughly tied. In July, according to Media Metrix,
SportsLine?s combined at home and at work reach 4.9% in July, versus
ESPN.COM?s reach of 5.2%. We believe if we add ESPN?s co-branded sites,
including NFL.COM, NASCAR.COM, NBA.COM, and WNBA.COM, we estimate the
ESPN network?s reach would be slightly higher. While these sites can draw traffic
to ESPN, these sites do not appear to be generating advertising revenues directly.
We believe the combination of CBS, aggressive content creation, and other
competitive efforts could allow SportsLine to become the clear leader, although we
do not believe that is necessary to make money in the stock.
Clearly, Sportsline is making every effort in this battle. We expect it to shortly
announce an extension and expansion of its distribution agreement with AOL.
While this will probably entail near-term expense increases, as with the TV show,
we believe the investment will provide significant returns later years. We believe
the stock will react positively to any progress we see this fall.
ONSALE LAUNCHES VACATION SERVICE: ONSALE has been quietly building
its community of cost-conscious shoppers. We estimate that ONSALE has over
670,000 registered bidders. We have been challenged to gauge the size and
growth pace of ONSALE?s market opportunity. We have not been fully appreciative
of ONSALE?s leadership position within its chosen category. We have been
concerned that competition may be sneaking up, but ONSALE has kept ahead.
Gross margins have moved around, but volumes have continued to rise. As the
story evolves, ONSALE appears to have built community of loyal customers
looking for bargains. Its marketing target has remained primarily business people
with a technology interest. It has reached these customers more by word-of-mouth
than by aggressive marketing through Web distribution agreements or traditional
media. It attracts more than 100,000 unique visitors daily and over 2 million monthly.
Its customers spend an average of $800 per year, which ranks high among e-
tailers. With a bit more marketing, we expect this target audience could measure 5-
10 million people within a few years. As indicated by this week?s launch of its time-
share auction service, ONSALE continues to expand its offerings from the computer
and technology-related merchandise, which represent about 80% of its current
sales. High levels of repeat purchases (i.e. over 75%) point to a defensible
business model. While auctions are fun, the underlying element is to offer goods
and services at some discount for a short period of time. Because of its ability to
know what you want based on bids lost, ONSALE plans more direct marketing to its
customer base, for example. We expect more announcements regarding other
partners and categories. Overall, we are encouraged by signs that ONSALE has
defined a new real-time retail segment that can prove both defensible, scalable,
and profitable.
THE BIG PICTURE: This week the market capitalization of the 50 companies in the
ISDEX index is approximately $63.5 billion, with total trailing sales of almost $7.7
billion, suggesting a revenue multiple of 8.2 times. This is down from $76.4 billion
last week. This compares to the top 20 media companies, which have a combined
market capitalization of approximately $371.3 billion, compared to total trailing 12-
month revenues of about $174.1 billion, for a multiple of almost 2.1 times. This is
down from $391.1 billion last week.
If the table below isn't formatted correctly in your email browser, please open the
word document attached or visit the website at www.internetstocks.com.
Rating 9/3/98 8/27/98 1-Wk 52-Wk Change from Price
Price High 52-Wk High Target
Change to 9/3/98
8/27-9/3/98 Price
Amazon AMZN BUY $85 7/8 $119 -28% $147 -41.6% $46
America Online AOL SBUY $86 3/4 $105 -17% $140 1/2 -38.3% $124
CNET CNWK SBUY $41 1/4 $41 1/2 -1% $74 1/2 -44.6% $68
E*Trade EGRP SBUY $18 1/4 $22 1/4 -18% $47 7/8 -61.9% $51
Excite XCIT BUY $25 1/2 $34 4/9 -26% $55 1/2 -54.1% $46
Getty GETY SBUY $14 4/7 $15 3/8 -5% $28 1/4 -48.5% $40
Lycos LCOS BUY $25 1/3 $34 1/4 -26% $53 5/8 -52.8% $44
NetGravity NETG BUY $8 3/8 $10 1/4 -18% $32 1/2 -74.2% $38
NewsEdge NEWZ LTA $7 $8 1/8 -14% $19 3/4 -64.6% $18
N2K NTKI LTA $8 1/4 $9 5/8 -14% $34 5/8 -76.2% $18
Onsale ONSL BUY $17 1/8 $20 1/8 -15% $36 4/5 -53.5% $51
Preview Travel PTVL BUY $18 5/8 $21 1/2 -13% $44 -57.7% $43
Infoseek SEEK LTA $17 1/8 $23 3/4 -28% $45 -61.9% $30
SportsLine USA SPLN SBUY $22 $21 1/2 3% $39 5/8 -44.3% $61
Yahoo! YHOO BUY $75 1/5 $91 -17% $103 3/4 -27.5% $64
Internet Stock Index
ISDEX $95.38 $111.49 -12% N/A 2.7%(1) N/A
NASDAQ Composite Index
COMQ $1571.86 $1686.41 -7% N/A -3.0%(1) N/A
(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, 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 E*Trade, Excite,
Onsale, and SportsLine USA within the past three years.
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
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Copyright * 1998 BancBoston Robertson Stephens Inc.
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