Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Microcap & Penny Stocks : IATV - ACTV Interactive Television -- Ignore unavailable to you. Want to Upgrade?

To: art slott who wrote (4740)	6/14/2000 11:15:00 AM
From: art slott	Respond to of 4748

part 2 ...IATV: A Good Story Getting Better; Livewire Deal Analysis --OPINION------------------------------------------------------------------- 2001 estimates for ACTV. We are increasing our 2001 EBITDA estimate to about $(15) million from about $(20) million and our EPS estimate from $(0.32) to $(0.22). Given that the completion of the AT&T/Liberty Livewire hosting services will not be completed until 4Q00 and the need to train Livewire's creative staff in HyperTV authoring, our full year 2000 estimates are unchanged for the time being, although upside is still achievable based on the potential for an accelerated rollout of HyperTV. For modeling purposes, we have assumed that the Livewire deal will allow HyperTV to sign up an incremental one new TV network partner beginning in 2001, while increasing the number of half-hour shows per network by one, as well. We have also ratcheted up our audience assumptions. Beginning in 2001, we have boosted our penetration rate assumption to by 5 percentage points a year, which implies 22.5% penetration beginning in 2001, growing to 42.5% in 2005. However, this revenue boost will be offset by the outsourcing of hosting services to Liberty Livewire. As a result, beginning in 2001, we have eliminated hosting revenues from our HyperTV model. Similarly, we have accelerated the reduction of ACTV's content creation revenues in order to factor in Liberty Livewire's role in developing HyperTV content. We had previously assumed that ACTV would develop HyperTV content for 30% of its TV programmers in 2001 and holding steady at 20% every year thereafter. Our revised estimates now assume that ACTV will provide content creation services only to 15% of its TV programming partners in 2001, 10% in 2002, and 5% per year beyond 2002. Consequently, our revenue estimates for HyperTV are essentially unchanged through the duration of our model. However, as we mentioned earlier, the removal of lower margin hosting services and content creation and the greater emphasis on higher margin online advertising, e-commerce, software licensing, and data management should boost EBITDA margins for HyperTV. For the year 2001, we have raised our HyperTV EBITDA estimate to about $7 million from $2 million. Longer term, we estimate that HyperTV steady state margins should improve about 500 basis points to approximately 55% from 50%, while also improving the return on capital profile. HOW IS OUR DCF MODEL AFFECTED? Our revised estimates translate into a modestly higher valuation for ACTV. Factoring in our new forecasts, our five year DCF model implies about $2 upside to our $50 price target for ACTV. The underpinnings of our DCF valuation remain unchanged; we utilize a 15% discount rate, which approximates ACTV's weighted average cost of capital, assuming a 6.5% risk free rate, a 5.5% risk premium, and Barra's predicted beta of 1.548 for ACTV. Our DCF incorporates a 35x terminal multiple. Although this terminal multiple may appear aggressive, our assumption implies a 12% perpetual growth rate which we believe is justifiable for a company still in the early phases of growth with returns on invested capital in excess of 35%, excess returns in the neighborhood of 20%, and significant free cash flow generation abilities. In addition, we believe that our terminal multiple compensates for our conservative operating model which assumes contributions from only two Fox regional sports networks for ACTV's Individualized Television service (despite ACTV having struck deals with 5 Fox regional sports networks) and excludes potentially lucrative data mining revenues for ACTV's interactive advertising application. INVESTMENT CONCLUSION--A GOOD STORY GETTING BETTER Net-net, we view the joint marketing pact with Liberty Livewire as a major strategic positive for ACTV. ACTV's stock has been under significant pressure recently (down about 23% over the past week), declining in tandem with the overall Nasdaq Composite and the pullback in its interactive television brethren. Nonetheless, we maintain our positive stance on ACTV, which we believe will emerge as a key beneficiary of the explosive growth of digital/interactive TV and the convergence of the PC and the TV. Based on our current operating projections, ACTV's closing stock price of $20.69 implies a hefty 35% discount rate, more than double ACTV's 15% estimated cost of capital. While current market conditions may suggest a higher risk premium is warranted, we consider the market-implied hurdle rate as too high, particularly in light of the Livewire deal, which we believe lowers the risks associated with HyperTV execution and scalability. With the company making significant strides in deploying both HyperTV and In dividualized Television, no external capital requirements required over the time horizon of our model, and firming relationships with key players such as Liberty Media, we believe that ACTV is a good story getting better. We maintain our 1S (Buy, Speculative) rating.