BANCAMERICA ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
keith_benjamin@rsco.com
August 14, 1998
The Web Report #33
BOUNCING LIGHTLY OFF THE BOTTOM: We are encouraged to see the stock
group appear to hit bottom and rebound slightly, which has been the pattern after
reporting season. We continue to encourage more aggressive buying of our
recommended Internet stocks, particularly during days of overall stock market
weakness.
The ISDEX average rose 1% this week, after falling 9% last week. The ISDEX has
already fallen approximately 23% from its most recent high of around 170 in mid-
July, compared to the NASDAQ, which has fallen approximately 10% during the
same time.
We expect a recovery by the end of September in anticipation of the next round of
positive fundamental news. Based on seasonal up-tick in traffic, advertising and
commerce, we expect further positive revenue and a few EPS surprises for the
September and December quarters, which should allow us to keep raising price
targets. As such, we would not be surprised to see the ISDEX average up 50%+
between now and December.
THE ONE STOCK TO BUY - AOL: During these market dips, we would
recommend starting with the biggest, if not best franchise - America Online, which
boasts evidence of strong earnings growth and a full pipeline of news, in our
expectation.
BUY RATINGS VS. PRICE TARGETS: Yahoo! and Amazon appear a bit less
attractive on a relative valuation basis, but still represent two of the best franchises,
in our view. The challenge, which many of you ask about, is that our published
price targets for Yahoo! and Amazon.com are below the current trading prices. The
reason we keep the Buy ratings is that we believe there could be so much upside
to our estimates for these two stocks that we will be able to raise our price targets
as well. If our confidence was lower, we might indicate that by a different rating. For
example, with Amazon.com, our 2001 model assumes less than 10 million people
buy around one book per year. We believe its brand could attract more people
and allow it to sell much more than books. As such, our EPS estimates and price
targets could be multiple times too low. We have debated whether or not to use the
term "valuation benchmark" as opposed to "price target", but have started with the
standard term. We view our ratings and our calculations as ways to help you rank
your choices as you build a portfolio of these stocks.
THIS WEEK¡S NEWS: We hope we will have a few weeks of light news,
particularly for these last weeks of August. However, the industry continues to give
us positive surprises.
NETGRAVITY: NetGravity announced a strategic technology and co-marketing
deal with IBM for online advertising. We believe this news highlights NetGravity¡s
leadership position. There continues to be competitive noise, which we find a bit
confusing and difficult to substantiate. As part of this week¡s announcement, IBM
will buy NetGravity¡s software for its own use. IBM will also co-market NetGravity¡s
software to its clients and provide the technology backend for AdCenter,
NetGravity¡s hosting service. IBM¡s focus will be e-commerce, which we view as a
new area of opportunity for NetGravity. We believe NetGravity¡s technology is the
key to encouraging advertisers to spend more on the Web and to enabling
merchants to sell more and potentially move its business model to where
NetGravity gets paid on a transaction basis long-term. We believe potential
catalysts for the company include the signing of new customers from among the top
100 sites, announcement of an expansion of individual contracts, the rollout of new
software versions in Q3 (and around the end of the year), and announcements of
new marketing partnerships, like this deal. We view the stock as a proxy for Web
growth, as the core business model is selling software to serve and track
advertisements, which entails selling additional copies as traffic increases at
customer sites.
E*TRADE: We are starting to see signs of acknowledgement of E*Trade¡s new
service, Destination E*Trade. This week it rose to the top ranking in the Gomez
Scorecard, a widely watched report. We expect more positive press to follow,
which we believe should help attract account and retail buying of E*Trade. The big
promotional push is scheduled for September, including prime-time television
advertising. We expect the stock could react significantly to this turn and retail
investor sentiment.
LYCOS: Lycos announced plans to acquire WhoWhere? Inc. WhoWhere? is best
known for its flagship directory service but also offers communication applications,
personal home pages (Angelfire), and free Web-based e-mail. We believe $133
million is a fair price for WhoWhere? and its established 10.6 million person
registered user base, suggesting a price of approximately $12 per person.
In our opinion, this acquisition improves Lycos¡ competitive position among the
portal sites by accelerating its path to being a full-service hub on the Web. The key
for Lycos, or any portal, is to keep more of its audience on the network with services
like communities.
In addition, we are impressed by the growth rates and brand momentum of
Angelfire and Tripod. Lycos currently has 3.1 million registered members in its
communities, including 1.3 million on Angelfire and 1.8 million on Tripod. This
compares to Geocities, which has approximately 2 million registered members.
The two Lycos communities were recently highlighted among the fastest growing
Web sites over the last six months, by Media Metrix, with Angelfire in 1st place and
Tripod in 7th place.
Including WhoWhere? total reach for the Lycos network in June would have been
31% versus 24.7%, according to Media Metrix. Lycos would have ranked 4th
behind AOL.com (44.9% reach), the Yahoo! network of sites (43.1% reach), and the
Microsoft network of sites (36.6% reach). The difficulty in comparing reach among
the portals is that now a significant portion of Lycos¡ traffic comes from communities,
where page views are arguably different and relatively difficult to sell. As such, we
would still rank Excite higher, based on the reach of its core network of channels,
and, more importantly, level of revenues.
WHAT ARE COMMUNITIES WORTH?: We view media value as a function of both
reach and frequency. Communities, like Angelfire, Tripod or Geocities, this week¡s
hot IPO, are growing at blistering rates, but that has not yet bred a big business
model. We estimate WhoWhere?¡s revenues are rather modest at this stage (i.e.,
single digit millions), as its focus has been more on building traffic than advertising
sell-through. The vast reach does not necessarily translate into long visits. As
such, we wonder about the attractiveness of community page views to advertisers.
The challenge for build-your-own-home page services is that a significant portion
of the page views are from individuals and friends checking their own home pages.
Some traffic is generated by search results randomly finding your home page,
which may be dedicated to your favorite movie, like Groundhog Day, or hobby,
Marathon Running, and contain keywords from the search request. The nice thing
about communities is that participants choose areas of interest, allowing
segmentation of advertising. Moreover, the registration data from home pages, e-
mail, and other community services can be used for targeting, which may be
particularly useful for commerce. As such, we expect community revenues can
grow to material levels, although we remain a bit unclear on when.
For Lycos, we believe the competitive picture is becoming clearer as the company
puts the puzzle pieces together. However, we still rate the stock LTA, because of
our concern that it will remain difficult to build momentum with so many brands.
Because of the simplicity of the Yahoo! brand, we expect it will continue to
dominate, but we believe there should still be room for other competitors, like
Lycos. We look for more clarification of traffic and business model strength when
Lycos reports its July quarter results next Wednesday.
THE BIG PICTURE: This week, for reference, the market capitalization of the 50
companies in the ISDEX index is currently around $77.8 billion with total trailing
sales of almost $8.1 billion, suggesting a revenue multiple of 9.6 times. This
compares to the top 20 media companies, which have a combined market
capitalization of approximately $391.7 billion, compared to total trailing 12-month
revenues of about $174.4 billion, for a multiple of almost 2.2 times.
If the table below isn't formatted correctly in your email browser, please open the
word document attached or visit the website at www.internetstocks.com.
Rating 8/13/98 8/06/98 1-Wk Price 52-Wk Change from Price
Change High 52-Wk High Target
8/06 to 8/13/98 to 8/13/98 Price
Amazon AMZN BUY $127 1/2 $109 1/2 16% $147 -13.3% $46
America Online AOL SBUY $106 4/7 $105 1/2 1% $140 1/2 -24.2%
$124
CNET CNWK BUY $ 46 3/4 $ 44 6% $74 1/2 -37.2% $68
E*Trade EGRP SBUY $ 27 $ 27 1/8 -1% $47 7/8 -43.7% $50
Excite XCIT BUY $ 44 1/3 $ 41 7/8 6% $55 1/2 -20.2% $46
Getty GETY SBUY $ 20 $ 19 4/7 2% $28 1/4 -29.2% $40
Lycos LCOS LTA $ 63 $ 57 7/8 9% $107 § -41.3% $72
NetGravity NETG BUY $ 14 5/8 $ 14 1/5 3% $32 * -55.0% $38
NewsEdge NEWZ LTA $ 6 4/7 $ 7 1/5 -9% $19 ‘ -66.8% $18
N2K NTKI LTA $ 13 3/8 $ 14 ‘ -9% $34 5/8 -61.4% $15
Onsale ONSL BUY $ 23 7/8 $ 24 7/8 -4% $36 4/5 -35.1% $45
Preview Travel PTVL BUY $ 29 1/4 $ 29 * -1% $44 -33.5% $43
Infoseek SEEK LTA $ 27 $ 24 ‘ 9% $45 -40.0% $30
SportsLine USA SPLN SBUY $ 27 3/4 $ 25 1/2 9% $39 5/8 -30.0% $61
Yahoo! YHOO BUY $ 92 3/4 $ 87 3/8 6% $103 ‘ -10.6% $64
*Internet Stock Index
ISDEX $ 132.11 $ 131.06 1% N/A N/A N/A
NASDAQ Composite Index
COMP $1802.54 $1829.51 -1% $2106.04 -14.4% N/A
*Last 12-month's performance of ISDEX - up 61% and of NASDAQ - up 14%.
Source: FactSet
ISDEX, The Internet Stock Index, is a trademark owned by Mecklermedia
(NASDAQ:MECK), used by permission.
BancAmerica Robertson Stephens maintains a market in the shares of
Amazon.com, CNET, E*Trade, Excite, Getty, Infoseek, Lycos, N2K, NetGravity,
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, Excite, Getty, NetGravity, ONSALE, Preview Travel, SportsLine
USA.
FOR ADDITIONAL INFORMATION, PLEASE CALL YOUR 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
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Copyright * 1998 BancAmerica Robertson Stephens |
