BANCBOSTON ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
keith@rsco.com
September 4, 1998
The Web Report #36
UNDERWATER BUT STILL BUOYANT: Sharp market corrections are always
marked by self-doubt. Why didn¡t I sell before this happened? For the stocks we
recommend and/or own, it is easy to feel that we may have missed something. We
do not believe anything material has changed for the Internet companies.
We remain confident regarding near-term prospects for traffic, advertising, and
commerce growth, particularly as we exit the seasonally slower summer. We
expect the fall will be full of your colleagues, friends, and family talking about what
they bought for you on the Internet. In some respects, one could argue that
valuation levels are just as difficult to rationalize relative to current revenues and
earnings for most of these stocks today, as they were a week ago at much higher
levels. Particularly if economic conditions slow somewhat, we believe investors
will pay a premium for growth. We believe the drivers to Internet growth remain
compelling, with business models potentially allowing for well above average
returns on investment after the initial years of brand building. Looking longer-term,
we remain convinced that the leaders will be able to reach much higher levels of
earnings than may seem obvious today, which should enable much higher stock
prices. The difference going forward is that we expect the competitive battles to
become clearer sooner, leaving room for fewer stocks. As such, we would
continue to focus on accumulating more stock of the leaders, like AOL, Yahoo! and
Amazon. During times of drastic swings in prices, it is important to remember past
volatility. With AOL, for example, there were multiple times when the stock had
fallen 50%, which could have provided an excuse to give up on the stock. To put
this in perspective, AOL¡s stock price has risen approximately 11949% from its
March 1992 IPO price of $11.50 per share. Next year, I believe we will be able to
look at this drop as a smaller percentage of a larger gain for the category winners.
ISDEX REBOUNDS 10%: On August 31, the ISDEX fell to 87.01, down 48% from its
most recent high of approximately 170 in mid-July. That was still higher than its
historic low of 70.08 at the end of April 1997. The NASDAQ fell around 25% during
the same time. As of September 3, the ISDEX gained back 10% from this recent
low, while the NASDAQ gained only about 5% during the same period. The ISDEX
is up 2.7% over last year, compared to the NASDAQ, which is down 3%. While we
do not want to deny the risk of continued stock volatility, we do not see material
downside risk from here. The ramifications of Russia and Japan will certainly have
some real impact, but we don¡t see the degree significantly dampening the U.S.
economy. Interest rates are also not high enough to entice me to shift my mutual
fund and other investments from equity to debt. The best case, in our view, would
be for some stock price stability for a few months. With many institutional investors
returning from summer vacations next week, we believe we could see a recovery in
many stocks, particularly those with above average growth, with the Internet stocks
at the top of that list. The counter argument is that the Web stocks have been too
volatile and will continue to scare some investors away. For retail investors, if
these stocks do not recover, there is a risk of tax-related selling as we approach
year¡s end. We think these fears will lead to greater selectivity, allowing stock price
appreciation for selected companies near-term.
WEB NEWS FLOW SHOULD CONTINUE TO PROVIDE POSITIVE CATALYSTS:
We look to category leaders with potential positive news in September and
October. Among the top tier, we expect more announcements from AOL than
Yahoo! or Amazon.com. However, Yahoo! could make some more commerce
deals and Amazon.com could announce its next product category. We expect
strong quarters for all three. In the next tier, CNET should unveil its commerce
auction winners very soon. E*Trade launches its Destination E*Trade next week.
SPORTSLINE ADDS NEW TV SHOW: The company continues to step up its
competitive pace with the introduction of a new weekly football show, FOOTBALL
PLAYBOOK, providing in-depth, pre-game analysis by legendary NFL coaches
Marv Levy and Sam Wyche. The * hour show will be aired in 70 major markets on
Sunday¡s during the season. While we estimate this will cost approximately $2
million over the next 3 quarters, we believe the show can help draw significant
audiences to the site. Moreover, it demonstrates the company¡s commitment to
creating original content to differentiate its brand and its service. Combined with
football promotion from CBS this fall, we expect SportsLine will be able to secure its
position among the top two sports sites. We believe the race remains between
SportsLine and ESPN, although CNN/SI has a good service and Fox continues to
make an effort with its site. However, access to the larger sports television
audiences of CBS and ESPN appear the swing factor in terms of online market
share. |
