Internet Software & Services – 23 November 1998
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redistribution of equity valuations that investors focused
on companies which rely on the existing Internet model
may abandon the space for some time.
With regard to Internet commerce and Amazon.com
(which wears the mantle of Internet commerce with the
least modesty and is the single company which we regard
as most egregiously overvalued within the Internet
universe), we have thus far been very unsuccessful in
predicting the recent movement of the stock price. Over
the past 30 days, the stock as increased in value by more
than 50%. At the same time, the stock seems to be almost
empirically mispriced. We continue to believe that
Amazon.com enjoys almost no significant competitive
advantage in a market characterized by razor-thin
operating margins. The company's success in generating
revenues has come at the cost of very great operating
losses which we expect to continue for a substantial period
of time. While other Internet companies are at almost
perpetual risk from shifts to the technological and
competitive landscape, Amazon.com seems to have left
itself with no high ground on which to retreat.
It seems almost universally acknowledged that Internet
stocks are, broadly-speaking, overvalued (in some cases
grossly so). The question has now become: What event or
series of events will cause investors to reevaluate the
prospects of Internet stocks and bring valuations down to
more reasonable levels. We believe that the next stage of
the network's development (including the more universal
deployment of broadband connectivity, the propagation of
device-based Internet solutions and the availability of
much richer functionality at the consumer level) will
trigger that reevaluation over the next 18 months. During
the interim, we continue to advise investors to focus on
those public companies best-positioned to successfully
transition to the next model (AOL is the most obvious
example) and to concentrate on relative valuations using
price-to-forward revenue multiples regressed against
prospective operating margins. Those valuation
calculations are available from us on a daily basis.
[AOL, LCOS, TFSM] MLPF&S was a manager of the most recent public offering of securities of this company within the last three years.
[AMZN, TFSM, YHOO] The securities of the company are not listed but trade over-the-counter in the United States. In the US, retail sales and/or distribution of this report may be made only in states where these securities are
exempt from registration or have been qualified for sale. MLPF&S or its affiliates usually make a market in the securities of this company.
Opinion Key [X-a-b-c]: Investment Risk Rating(X): A - Low, B - Average, C - Above Average, D - High. Appreciation Potential Rating (a: Int. Term - 0-12 mo.; b: Long Term - >1 yr.): 1 - Buy, 2 - Accumulate, 3 - Neutral, 4 -Reduce,
5 - Sell, 6 - No Rating. Income Rating(c): 7 - Same/Higher, 8 - Same/Lower, 9 - No Cash Dividend.
Copyright 1998 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). This report has been issued and approved for publication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited, which is
regulated by SFA, and has been considered and issued in Australia by Merrill Lynch Equities (Australia) Limited (ACN 006 276 795), a licensed securities dealer under the Australian Corporations Law. The information herein was
obtained from various sources; we do not guarantee its accuracy or completeness. Additional information available.
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