The Web Report:
BANCAMERICA ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
keith_benjamin@rsco.com
July 2, 1998
The Web Report #27
We think the timing of a long weekend is perfect. These stocks need a break. While we believe the group
will end the year higher, we would look to take some profit in certain of the franchise names. We expected
some weakness to occur when the quarter ended Tuesday. Maybe we're crazy, but we remain a bit
concerned that most of the volume appears to be mostly retail through the wholesale traders.
Valuation remains a challenge, but we continue to believe the focus should be on which companies will
lead and dominate as the industry both grows and consolidates. There are three stocks which appear to
boast big brand names that we believe can demonstrate reasonably dramatic earnings leverage long term
from incremental audience, advertising and commerce growth. These are AOL, Yahoo! and Amazon. The
valuation for each now exceeds our benchmark 50 multiple of estimated 2001 EPS. AOL is at 64 times our
$1.72 2001 EPS estimate. Yahoo! is at 74 times our $2.30 2001 EPS estimate. Amazon is at 130 times our
2001 $0.88 EPS estimate. Based on these rough estimates, we would not be surprised if Amazon and
Yahoo! see stock pauses or temporary declines after June quarter EPS reports. We just don't expect to be
able to raise numbers enough to close the valuation gap. However, we believe we could be significantly
low on each company's estimate, primarily based on our view that we are being conservative on industry
growth assumptions. This should justify higher stock prices long term.
We watch Amazon.com's stock with awe and wonder about its brand power. When you think of shopping
on line, don't you think of Amazon.com first? Do you believe 10 or 20 million people might buy a book or
a CD or something else from Amazon.com by 2001? The leverage on an incremental 5 or 10 million
people and/or another $20 in revenue per person can provide geometric EPS increases in a few years. As
such, we are not giving up on our Buy rating.
We would still be more aggressive buyers of those stocks whose valuations do not reflect a consensus of
opinion on competitive position and business model leverage. We would continue to focus on Getty
Images, SportsLine, and E*Trade.
In Getty's case, it appears to be overlooked by both institutional and retail investors, more because of
stock-related issues than fundamentals. It has a solid, defensible and growing analog image business that is
being accelerated by digital delivery. Our confidence level remains high for the quarter. We believe the
stock could quickly reach our $40 price expectation, which is based on a multiple of 27.5 times $1.45
F1999 EBITDA per share.
With SportsLine and E*Trade, competitive concerns appear to miss the ability of both markets to support
significant growth for multiple competitors.
E*Trade's stock appears to be selling as if it's a low-margin, slow growth discount broker. We expect
higher-margin growth from E*Trade's promotion of Destination E*Trade. We believe it can differentiate
itself from its competitors through proprietary content and scalable technology. Its logical competitors, the
full service brokers, appear constrained by inability to dispose of retail brokers. 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.
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AOL: Among the recognized franchise names, we would rank AOL as having the most balance of risk and
reward, as it has already reached a critical mass of revenues and profits with AOL's dominant position in
the home market. Positive surprises appear imminent from multiple sources. Long term, broadband access
should boost home market size. AOL's reach into the office market can be facilitated by this week's
launch of a new version of CompuServe and our expectation of improvements in the AOL.COM
technology. With another $500 million in cash from this week's equity offering, acquisitions might be
possible, but none appear obvious to us today.
AOL appears to be taking the leader's share of both advertising and commerce revenues. We believe more
advertisers are dramatically increasing budgets in recognition of increased audience sizes at AOL and the
Web. Merchants appear to be generating enough revenues to rationalize paying more rent.
Yesterday, the company announced a three-year deal with Unilever for an undisclosed amount. We
estimate it represents a step up for impression-based advertising deals from the single to double-digit
million dollar level. It now appears the Web is ready for soap, if not bubbles. Unilever is a worldwide
consumer packaged brand leader, whose brands include well known food products and home and personal
care products, including Lipton, Wish-Bone, Ragu, Klondike, Surf, Lever 2000, Dove, Ponds, Vaseline, Q-tips,
Close-up, Pepsodent, Finesse, Aqua Net, Calvin Klein and Elizabeth Arden, among others. The
brands will have a prominent placement throughout the AOL and CompuServe services, with efforts made
to place products in relevant areas, such as cooking, entertainment, childcare and health & fitness. We
believe Unilever's British/Dutch ownership and international reach will help AOL capitalize on its growing
international audience.
This week, AOL raised the rent on the online brokers highlighted in its financial channel. AOL signed a 2-
year pact with E*Trade, DLJDirect and Waterhouse securities for a combined total of $75 million. Each
company has agreed to pay AOL $12.5 million annually to be the premiere brokerages in AOL's new
Brokerage and Mutual Fund Centers in the AOL Personal Finance Channel. In addition, direct access to
the brokerages will be integrated into AOL's newly launched Investment Research area.
In sum, we believe there remains considerable upside to our AOL estimates and the stock.
THE BIG PICTURE
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 $84 billion, up from $76 billion
last week. This compares to the top 10 media companies, which have a combined market capitalization of
$306 billion, which grew from $287 billion a week ago.
With total trailing sales of almost $7.6 billion for the ISDEX companies, its market capitalization to
revenue ratio is now 11 times. AOL represents about $27.9 billion of that total. With 1998 revenues
projected at $2.6 billion, AOL is selling at 10.7 times revenues. If we compare this to the major media
companies, AOL's market capitalization would rank below Disney (DIS $106 1/4) at $72 billion, Time
Warner (TWX $86 3/16) at $49 billion, News Corp. (NWS $32 1/2) at $32 billion, and above CBS (CBS
$33 3/16) at $24 billion, MediaOne Group (UMG $44 3/8) at $27 billion, Viacom (VIA.B $59 13/16) at
$21 billion, TCI (TCOMA $39 7/16) at $21 billion, Clear Channel Communications (CCU $111) at $14
billion, and Chancellor Media (AMFM $51) at $7 billion. The total market cap for these 10 companies is
around $306 billion, compared to total trailing 12-month revenues of about $86 billion, for a multiple of
almost 3.6 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 data supporting the underlying Web drivers appears robust.
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