I admit it. I'm a stubborn mule. I still like Netscape. I even bought the stock today.
I've read some of the analysts reports, even gotten some rather bearish comments from one of the entrants in my contest. I think a lot of it is B.S. Typical is this "choice cut" from Hambricht & Quist's latest musings on Netscape (with many thanks to the person who sent me the report):
The question therefore is whether the parts of Netscape's business justify Netscape's current valuation? And if so, can they provide enough of a base to generate any upside. In this respect, the most important question is whether or not Netscape can derive more revenue from its enterprise sales, especially now that we can assume that its client stand-alone business is quickly approaching zero.
We look to a price per seat analysis to determine whether indeed Netscape's 800+ design wins can be converted into real revenue. The 800+ design wins after all, will not be worth much if price erosion on a per seat basis is moving closer to zero. If we assume that of our $580 million revenue forecast for CY98, $112 million of the revenue is Web-site related (assuming 20% year-to-year growth), the remaining $468 million would have to be generated from Enterprise accounts. If we assume that 800 design wins translate into approximately between 5 million and 10 million seats (remember a design win is at minimum 500 seats), Netscape must achieve an average per seat price of between $47 and $94, all included.
Obviously the more seats out there, the lower the price per seat and vice versa. We expect Netscape to be able to achieve higher per seat levels as a result of recent acquisitions (Actra and Kiva). Unfortunately management has been unable to provide us with the necessary information to understand whether there has been price per seat erosion, whether it will stop, or whether they can achieve the per seat price goals necessary to meet or exceed our revenue expectations.
Summary and Recommendation
We expect to re-evaluate whether indeed Netscape can achieve higher per seat pricing and sales in the coming weeks. Until then, we expect Netscape shares to stabilize within a $16 to $24 range primarily based on acquisition rumors, and thus reduce our rating from a STRONG BUY to a BUY.
I mean, give me a break.
The 800+ design wins after all, will not be worth much if price erosion on a per seat basis is moving closer to zero.
This statement is based on just pure speculation, since, as the report makes clear later on, they don't even know what Netscape's pricing policies in the enterprise software arena are.
And, what happened to the argument that the name of the game in software is standards, standards, standards. Is it "worth much" for Netscape to lower its prices in order to get its software into as many hands as possible so it can set standards? When Microsoft started giving their browser away based on this justification, analysts certainly thought so. I think the same argument applies to Netscape.
Obviously the more seats out there, the lower the price per seat and vice versa.
Say, what now?
I don't get it. Why does selling more seats necessarily lead to a lower sales price per seat?
And, even if it did lead to a lower sales price per seat, would that necessarily be bad? Would not the more sensible approach be to set the price at whatever level maximises total revenues, or, thinking on a more long term basis, whatever level gets the most software into the hands of users and keeps it there?
Unfortunately management has been unable to provide us with the necessary information to understand whether there has been price per seat erosion, whether it will stop, or whether they can achieve the per seat price goals necessary to meet or exceed our revenue expectations.
Well, this may or may not be a legitimate criticism. Maybe management needs to explain its pricing better, or maybe it's proprietary, I don't know. But, regardless, this statement shows that the whole rest of the report's discussion of Netscape's future is speculation and should be treated accordingly.
Earlier in the report, it says:
Obviously the Netscape story has continued to morph. First Netscape was a browser story, then it went through its messaging phase, and now we find the company shifting to being the provider of Web-based applications, e-commerce solutions, and messaging capabilities backed by a professional services arm to help in the deployment. Simultaneously, the company is clearly trying to further exploit the traffic aggregation element of its business- which generated $94 million this year-by culling 150 people on this effort.
Well, when Microsoft "morphed" into an "internet company" on December 7, 1995, everyone called it brilliant. Some of us have questioned whether Microsoft really has changed or has changed enough, and have doubted the depth of Microsoft's commitment to the internet, but no one can deny that Microsoft has made significant changes to its strategy since that day, on more occassions and with greater inconsistency that I care to describe. When Microsoft does it, the analysts call it "flexibility," and the stock price goes up.
I think Netscape's willingness and ability to adapt to changed circumstances, to change strategies when the strategy you are trying is not working, is a strength, not a weakness.
So, let's look at some facts:
1. Netscape's management is one of the best, from Barksdale, Homer and Clark on down.
When investing in technology companies, you should invest on the basis of who has the best management, not who has the best technology. Today is a clear lesson in why.
The best management will find a way to obtain and market the best technology. As too many cases to count attest, the best technology does not necessarily find the best management.
Asset-based valuations, whether from Mary Meeker or Hambricht & Quist, or Readerman or someone else, do not, in my opinion, give adequate credit to Netscape's management.
I may not agree with everything Netscape's management does. I have my own views on the DOJ thing. If they decide to give away the browser, I'll probably disagree with that. But I do trust management's good faith and ability to do what is best for the company. They will either make their solution work or find the solution that does work.
The real question is not whether Netscape's web site will generate more revenue next quarter (if they lose the browser war, it won't), or whether they can get enough "seats" to fill the gaps in someone's revenue projections.
The real question is whether Netscape's management is capable of meeting the very serious challenges the company faces. Wall Street obviously thinks they are not. I think they are.
2. Most of what came to a head today was already known. Certainly the people who post to and read this thread have known for a long time that Netscape was losing browser market share. We have known for a long time that, in order to reduce dependency on browsers, Netscape has been moving from stand alone browser sales to messaging and enterprise software sales.
Netscape failed to meet its numbers this quarter because (1) the drop in browser sales happened faster than the messaging and enterprise solution sales could make up the difference and (2) due to price competition from IBM and Microsoft, messaging and enterprise sales did not meet expectations.
The market was well aware of both of these trends long before today. What was not known was the degree or extent of their impact.
Today, we got a big price drop in Netscape stock on very heavy volume. Then we got all the usual post hoc brokerage downgrades, to which my only question is: where were they when the stock was trading at 50?
The stock has been going down for a very long time, which leads me to think that maybe what what happened today is a case of capitulation. The Street has given up on Netscape.
I do not know where the stock will finally bottom out: whether it's 12, or 15, or 20, or 24 (my guess is that, after January 13, it will go up). But come on folks, get a grip. It's only one quarter. Let's get some perspective. |
