BANCAMERICA ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
keith_benjamin@rsco.com <mailto:keith_benjamin@rsco.com>
June 26, 1998
The Web Report #26
The stocks continued to rally this week, with most retracing to their
52-week highs.
The franchise names made new highs, with Amazon up 38% over last week,
Yahoo! up 19%, and AOL up 15%. All are now above the price targets we have
set, based on what we believe are rather conservative estimates. The
variance is greatest with Amazon and smallest with AOL. However, we believe
the upside to our Amazon estimates remains considerable. While we believe
the group will end the year higher than current levels, we expect the
quarter's end might result in some profit taking next week. Depending on
one's time horizon, as a rough indication of our trading instinct, if we
owned 100,000 shares each of AMZN, YHOO and AOL, we might sell 50,000 of
AMZN, 25,000 of YHOO, and keep our AOL.
While CNET has also made a new high, we believe its EPS leverage from its
core business and the NBC/Snap! joint venture could prove so dramatic that
we would continue accumulating the stock.
SportsLine has languished on a relative basis, primarily due to competitive
concerns, in our view. As discussed below, we view the sports segment as
one of the Web's most promising, with only two or three key players. This
suggests substantial opportunity for SportsLine, even if it builds a leading
position with a close second.
Another big market should be on-line travel. With Preview Travel, the
leader in terms of traffic to its site, there appears opportunity to convert
daydreamers and planners into buyers. Its stock has also not recovered to
its high. We expect news over the next few months regarding service
improvements, which could help the company, the model, and the stock.
We would continue focusing more attention on those stocks that remain well
below their highs, particularly Getty Images and NewsEdge. Both appear to
have been ignored by both retail and institutional investors. We would lean
towards Getty because of expectations of more upside to its June quarter.
E*Trade is also selling far below its highs, as investors wait to see a step
up in account growth, in our view. We believe marketing of Destination
E*Trade starting in the September quarter can help accelerate account
growth. Looking forward, we expect the financial model will be in flux as
the company transitions from a pure transaction model to a financial
destination site. Ultimately, we believe the net result should be more
predictable/profitable subscription fees, mutual fund fees, advertising, and
international licensing fees. We may be a bit early, but we are attracted to
the stock at current levels.
We believe the long-term opportunity in the group is still significant as
audience time and advertising/commerce revenues shift from traditional media
to the Web. For quick reference, the market capitalization of the 50
companies in the ISDEX index is currently around $76 billion. This compares
to the top 10 media companies, which have a combined market capitalization
of $287 billion.
With total trailing sales of almost $7.6 billion for the ISDEX companies,
its market capitalization to revenue ratio is now 10 times. AOL represents
about $22.3 billion of that total. With 1998 revenues projected at $2.6
billion, AOL is selling at 8.6 times revenues. If we compare this to the
major media companies, AOL's market capitalization would rank below Disney
(DIS $112 1/2) at $76 billion, Time Warner (TWX $87 1/16) at $49 billion, News
Corp. (NWS $28 5/8) at $29 billion, CBS (CBS 31 1/2) at $23 billion, MediaOne
Group (UMG $42 5/8) at $26 billion, Viacom (VIA.B $58 5/8) at $21billion,
and above TCI (TCOMA $39 1/4) at $21 billion, Clear Channel Communications
(CCU $105) at 13 billion, and Chancellor Media (AMFM $48.3/4) at 7 billion.
The total market cap for these 10 companies is around $287 billion, compared
to total trailing month revenues of about $83 billion, for a multiple of
almost 3.5 times.
We wonder if the total ISDEX market capitalization is the right number
long-term, with fewer than 50 companies surviving or remaining independent.
Our Buy ratings remain based on our view of improving fundamentals. In
fact, news and date supporting the underlying Web drivers appears robust.
Some of the recently published estimates may be a bit aggressive, but seem
to point in the right direction. According to a new IDC report, there are
currently 100 million regular Web users worldwide. The study forecasts that
Internet-related spending of businesses and consumers will reach $124
billion this year and over half a trillion dollars in 2002. We suspect the
definitions used here may be a bit broad.
We expect broadband access to help facilitate long-term Web penetration into
homes. PC penetration, according to a recent Ziff-Davis (ZD) study, is up
to over 45 million U.S. households. While this might be an aggressive
estimate, counting some older PCs which are not actively used, it does
suggest the home Internet market could more than double from our current
estimate of over 20 million U.S. households. However, we believe the taste
of speed at work will require speed at home.
The good news is that AT&T's plan to acquire TCI appears partially based on
the recognition of this appetite. While we are somewhat jaded about this
new company's ability to deliver faster Internet connections, we have hope.
While some may have been disillusioned that AT&T did not buy AOL, this deal
could turn out to be quite beneficial to AOL's growth prospects. This could
prove particularly helpful to companies like AOL, which are seeking to buy
broadband lines under various wholesale deals.
SportsLine Update
SportsLine's stock slipped slightly this week on news that CBS sold some of
its shares. We do not believe this is any reflection on near-term or
long-term prospects for SportsLine. To put the sale in perspective, the
200,000 shares sold account for only 4% of CBS's total interest of
approximately 4.8 million shares. We do not expect any significant sales
anytime soon; however, we believe additional small sales are possible during
quarterly windows. We suspect it is always tempting to take profits in Web
stocks. It also remains difficult to value SportsLine or its peers,
particularly from the perspective of a relatively mature company that sells
at a smaller multiple of current earnings. We suspect CBS may view its
investment differently and may be consider buying the rest of SportsLine
when the company reaches notable revenue and earnings levels. We expect
this is possible within the next 2 to 3 years.
To review the CBS agreement, as of February 28, 1998, CBS had 2,248,075
shares, including the January exercise of 380,000 warrants. After selling
200,000, CBS now has 2,048,075 remaining. Each year for the next 3 years,
CBS will receive another 380,000 warrants for a total of 1,140,000 shares,
bringing the subtotal to 3,188,075. Adding the 558,988 shares in C1999,
567,579 shares in C2000 and 485,358 shares in C2001 that were granted
outright as part of the deal, the total would be 4.8 million, after the
recent sale.
Why is CBS selling while other companies are buying? When we look more
closely at the two recent deals, it also appears the other media companies
are shy to pay up for equity in any of these stocks, despite how it might
look on the surface with the recent NBC and Disney deals. NBC bought 5% of
CNET at $32-1/4, a sharp discount to the current price of $66-1/2. NBC's
investment in Snap! also appears to be at an attractive valuation. Disney
contributed mostly undervalued assets and loaned money for its preliminary
stake in Infoseek. We believe if Infoseek generates significant revenues
and earnings, it is highly probable that Disney will exercise its option to
buy a majority of the company at a price of up to $50 per share. If the
Disney and ABC brands, as well as television/cable exposure, do not help
attract viewers to Infoseek's new service, we believe Infoseek will be left
with significant expenses and a questionable stock. We have doubts whether
a loyal Yahoo! user will switch services and believe the brand remains a big
draw for both adults and teens, if not younger Disney fans.
Back to SportsLine, we are confident the quarter will meet or exceed our
estimates, based on announcements of World Cup traffic and sponsorship
deals. Looking to the next positive catalyst for the stock, we believe the
key will be to show growth in the face of continued competition from ESPN
SportsZone. Disney and Infoseek are now preparing for more aggressive
promotion for the new network which will contain ESPN. SportsLine remains
totally focused on sports. In addition to creating a great depth of general
sports content, SportsLine offers memberships, gambling information and star
athlete sponsorships. In keeping with SportsLine's aggressive competitive
posture, we would not be surprised if the company seeks to expand its
partnership with AOL, which is up for renewal in September. On-line
distribution deals appear possible with the other networks. However, we
believe we will see the real game played this fall, on the football field.
In our opinion, SportsLine will win this game with the help of the CBS
broadcast coverage of NFL football. Ultimately, however, we believe that the
sports market is a huge business and that there will be more than enough
room for multiple players on the Internet. In our view, SportsLine is one
of the most attractive Internet stocks, positioned to lead one of the
largest Web content categories and greatly exceed our estimates. Our price
target is $60 based upon a 50 multiple of our C2001 EPS estimate of $1.18.
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 <http://www.internetstocks.com> .
1-Week
% Change
6/25/98 Price
to 6/18/98
52-Week Price
Rating 6/25/98 6/18/98 Price High
Target
Amazon AMZN BUY $99 $72 38% $92 3/4 $45
America Online AOL SBUY $108 $93 7/8 15% $106
1/2 $85
Cendant CD LTA $21 1/2 $19 1/8 12% $41 2/3 $30
CNET CNWK BUY $66 1/2 $58 1/8 14% $69 1/4
$65
E*TRADE EGRP BUY $22 1/4 $21 6% $47 7/8 $45
Excite CIT BUY $79 1/8 $73 1/8 8% $93 1/3 $95
Getty ETY SBUY $19 7/8 $19 7/8 0% $28 1/4 $40
Lycos COS LTA $69 4/7 $61 5/8 13% $79 1/8 $75
MemberWorks MBRS SBUY $31 1/8 $29 3/4 5% $33 1/2 $50
NewsEdge NEWZ BUY $ 9 4/7 $ 9 5/8 -1% $34 5/8 $25
Onsale ONSL BUY $28 $23 7/8 17% $36 4/5 $45
Preview Travel PTVL BUY $34 1/4 $33 4% $38 1/8 $45
Infoseek EEK LTA $34 3/4 $35 1/8 -1% $45 $30
SportsLine USA SPLN SBUY $34 $35 1/2 -4% $39 5/8 $60
Yahoo! YHOO BUY $152 1/4$127 3/419% $140 3/8$115
Internet Stock Index ISDEX $155.875$142.4 9% N/A N/A
NASDAQ Composite COMP $1863.25$1772.7 5% $1917.61 N/A
Index
(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.
FOR ADDITIONAL INFORMATION CALL YOUR BANCAMERICA 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 the
Firm, the information upon which such opinions and estimates are based is
not necessarily updated on a regular basis; when they are, 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. The Company's 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."
BancAmerica Robertson Stephens from time to time performs corporate finance
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. Facts
and other information discussed have been obtained from sources considered
reliable but are not guaranteed. BancAmerica Robertson Stephens, its
managing directors, its affiliates, and/or its employees may have an
interest in the securities of the issue(s) described and may make purchases
or sales while this report is in circulation. BA Robertson Stephens
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The securities discussed herein are not FDIC insured, are not deposits or
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investment risk, including possible loss of any principal amount invested.
Copyright * 1998 BancAmerica Robertson Stephens
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