BANCAMERICA ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
keith_benjamin@rsco.com
June 19, 1998
The Web Report #25
Television Jumps on the Web
Television viewers will soon be seeing much more of the Web with Disney
partnering with Infoseek to promote a combined Web network, following NBC's
deal with CNET last week to jump start Snap! We view this as validation of
the value of Web networks as the next mass market media. Confusion
regarding deal terms and competitive implications appears to have hit the
Web network stocks. We wonder if the marketing muscle of these major media
companies may change the cost structure of the Internet network businesses,
with more effort required to maintain the differentiated brands. We tend to
believe that it may be more difficult to change the habits of loyal users
who are already devoted to Internet networks. The race seems more one of
capturing Web newcomers, which are probably now watching television. Our
conclusion is to believe both Yahoo! and Excite can prosper independently.
That leaves Lycos, which may now do a similar deal with Time Warner or News
Corp., both of which have smaller television networks. We wonder if either
of these combinations will be enough to shift much share. We also don't
expect much of a premium to be paid for Lycos, even for a minority interest.
We would be more aggressive on Yahoo! on any further weakness, based on our
belief that its brand can beat Disney on the Web.
This week began with reports that AT&T (T $ 62 1/4) had made an unsuccessful
bid for America Online (AOL-$93 7/8). While we can see why AT&T would view
AOL as an attractive prize, given AT&T's stalled Web strategy and AOL's
momentum, we don't see why AOL needs AT&T. As such, we believe it is more
likely that the two companies were in discussions for some type of strategic
alliance. We believe the new media alliances will have minimal impact on
AOL, which continues to dominate the home on-line market for both access and
its community of services. It may make it a bit harder for AOL to promote
AOL.com as planned this fall. However, we believe AOL's home members will
want easier access to personal e-mail and other services through the Web at
work. In addition, we believe the AOL brand, like Yahoo!, carries more
weight on the Web.
Back to the big news, whispers proved correct, as The Walt Disney Company
(DIS-$114 5/16) agreed to acquire 43% of Infoseek. We believe Disney's
investment in Infoseek appears to be a great deal for Disney and a fair deal
for Infoseek. On the one hand, Disney may be setting a floor for SEEK's
stock. Absent the potential for Disney buying the rest, we might see
pressure on the stock, given the new projections for significant losses in
1999 and 2000, and our uncertainty regarding the EPS potential under the
higher cost structure. Based on our recently revised 2001 EPS estimate of
$0.60, our price target of $30 remains below the current price. The tough
question, in our view, is whether or not the public shareholders of InfoSeek
or Disney will reap the return on the substantial new investment in
promotion. There are management benefits in keeping this high growth company
public. However, based on Disney's track record of acquisitions, our
inclination is to expect Disney will buy the rest at a modest premium. We
expect that the Disney brand name and the pending promotional spending may
encourage retail interest in buying Infoseek's stock, which could surprise
us. Regardless, on a fundamental basis, we still remain stuck on the stock
and continue to favor other names.
What Stocks to Buy Now - CNET
Today, we would continue to be aggressive buyers of CNET, which we believe
now defines the best of the content, commerce, and network business models
with strong competitive differentiation. We see considerable revenue upside
from CNET's ability to aggregate computer/technology buyers and link them to
sellers. Snap! could prove a big positive surprise as the competitive
landscape for the broader networks shifts. We see considerable upside to
our numbers and the stock.
Particularly in context of the deal between Infoseek and Disney, we are now
even more impressed with the deal CNET just cut with NBC. In the
build-versus-buy decision, there seems to be recognition of the time value
of the technology and editorial investment in creating Snap! and other Web
networks. Clearly, General Electric ($87 15/16), NBC's parent company, is as
well a managed company as Disney (DIS $112), in our opinion. Both appear
willing to pay the price to secure leadership positions in targeted market
segments. Both have big television audiences from which to draw a new
audience for their Web networks. We estimate that the value of NBC's
promotion of Snap! may be in the range of the $165 million Infoseek is
paying Disney for promotional consideration. The difference is that CNET is
not paying cash to NBC for its promotion of the Snap! joint venture. NBC is
also funding all of the future investments. After NBC exercises its option,
which we expect to occur once Snap! turns profitable in 1999, CNET will keep
a 40% stake. We expect there could be considerable upside to our CNET EPS
estimates from Snap!, which can be realized relatively quickly under the
significantly lower cost structure for CNET. This seems to provide a better
balance of returns for both NBC and the public CNET shareholders. We
understand the plan is to spin out Snap! as a separate public company.
What Other Stocks May Be Overlooked?
We would also focus on buying the stocks that have missed the rally, which
we view as driven more by retail than institutional buying. For example,
Amazon.com's stock jumped after its CEO sent an e-mail to its millions of
registered customers announcing the launch of its music site. As this had
been anticipated for many months by institutions, we did not view this as
news. However, it appears to have incited a frenzy of retail buying
activity in the stock. By contrast, up until the NBC deal, we suspect that
CNET was unknown to most individual investors.
Two stocks, Getty Images, and NewsEdge, also appear to have gone relatively
unnoticed. We view Getty as one of the strongest media franchises,
dominating the stock image business, which has been growing with the world's
greater appreciation of pictures and video than text. Yes, the surfer
picture we use to entice you to read our printed reports is a Getty image.
Getty now delivers this image to us in slide form. It is in the process of
shifting to digital delivery, which we believe can dramatically lower
distribution costs and allow an acceleration in earnings growth. The stock
is selling at less than 20 times 1998E EBITDA per share, with the growth
rate increasing towards 30% by 1999, by our estimate. We find the stock
compelling today in anticipation of a Q2:98 report of more progress on the
Internet enabling this business model improvement.
NewsEdge is a subscription-based news aggregation service that has built a
dominant position within financial and other industries. The Internet is
enabling more targeted delivery with the help of recently acquired
Individual. We believe the merger will allow higher revenues per customer
on cross selling of services to each account base. Because the sales cycle
take a few quarters, we expect more evidence by the September and December
quarters. We expect the stock can recover quickly on any signs of return to
profitability. We were very encouraged by signs of building backlog at the
end of the last quarter that give use confidence in our modest loss estimate
for Q2:98. While the market opportunity and business model may be more
targeted than are some of the pure-Internet stocks' business models, we
believe its subscription model offers advantages of predictability. On a
relative basis, we believe NewsEdge appears very reasonably priced. Even
using a lower target multiple of 30 times EPS than we typically use for an
Internet stock, we still derive a price target of almost $30, based on
estimated 2001 EPS of $0.93.
If the table below is difficult to read in your mail browser please refer to
the attached word document or go to the website at
internetstocks.com.
Rating 6/18/98 Price
6/11/98 1-Week %
Target Change 6/18/98
Price to 6/11/98
Amazon AMZN BUY $72 $45
$62 1/2 15%
America Online AOL SBUY $93 7/8 $85 $87
8%
Cendant CD LTA $19 1/8 $30(1) $20
4/7 -7%
CNET CNWK BUY $58 1/8 $65 $43
3/4 33%
E*Trade EGRP BUY $21 $45(2) $22
-5%
Excite XCIT BUY $73 1/8 $95 $64
1/3 14%
Getty GETY SBUY $19 7/8 $40 $18
2/3 6%
Lycos LCOS LTA $61 5/8 $75 $52
7/8 17%
MemberWorks MBRS SBUY $29 3/4 $50 $28
6%
NewsEdge NEWZ BUY $ 9 5/8 $30 $10
-4%
N2K NTKI LTA $18 3/4 $25 $16
3/4 12%
Onsale ONSL BUY $23 7/8 $45 $24
4/5 -4%
Preview Travel PTVL BUY $33 $45 $28
18%
Infoseek SEEK LTA $35 1/8 $30
$28 25%
SportsLine USA SPLN SBUY $35 1/2 $60 $29 4/9
21%
Yahoo! YHOO BUY $127 3/4 $115 $115
1/4 11%
Internet Stock Index ISDEX $142 2/5 NA $134
7/8 6%
NASDAQ Composite
Index COMP $1772 5/7 NA $1749 3/4
1%
(1) Based on a 20 multiple on 2001 earnings
(2) Based on a 30 multiple
Source: FactSet
BancAmerica Robertson Stephens maintains a market in the shares of
Amazon.com, CNET, E*Trade, Infoseek, Lycos, MemberWorks, Microsoft, N2K,
NewsEdge, OnSale, Preview Travel, SportsLine USA, and Yahoo! and has been a
managing or comanaging underwriter for or has privately placed securities of
C/NET, E*Trade, MemberWorks, OnSale, Preview Travel, SportsLine USA.
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Copyright * 1998 BancAmerica Robertson Stephens
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