BANCBOSTON ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
mailto:keith_benjamin@rsco.com
keith_benjamin@rsco.com
December 4, 1998
The Web Report #49
This week, the ISDEX index closed at 213.33, down 9.8% from the end of
last week, and up approximately 123.3% over the same period last year.
For comparison, the NASDAQ ended the week down 1.6% over last week and
up 20.9% from the same date last year.
RELIEVED TO SEE STOCKS PULL BACK A BIT - We saw several of the major
franchise stocks give back a little during the week. AOL was down 9%,
Yahoo! 12%, Amazon 10%, and eBay down 9%. These downturns, however, are
small compared with the big gains over the past month. We still believe
that, with almost no news expected until the beginning of next year, the
stocks have more downside than upside through year-end.
MAINTAINING POSITIVE FUNDAMENTAL OUTLOOK ON MARKET OPPORTUNITY- We
expect a big e-tailing season, which appears well reflected in the
stocks. For example, Amazon noted Thanksgiving weekend sales were up
four times over last year, a comparison off a small base, which also
appears in line with the recent pace. In response, the stock was
slightly off. We expect holiday sales from most of the other e-tail
stocks will not show such strong momentum. In addition to strong
commerce revenues, we expect double digit sequential growth in audience
and advertising revenue in the December quarter.
THE WEB IS A NECESSITY - We are intrigued by survey data just released
from AOL, suggesting that roughly 2/3 of Internet users would rather
have Internet access than a TV or phone if stranded on a desert island.
More practically, almost * of users get information on products through
the Web. Almost 1/3 of those who don't usually buy online go the Web
first for help. This suggests advertisers need to be on the Web, even
if not making sales directly. Further, this data confirms our belief
that the Web will continue to capture more audience time and more money
from both advertising and commerce.
ABANDONING PRICE TARGETS - We have been deriving our price targets from
our published earnings estimates over the next 3 to 4 years. Even
adjusting for the hopefully conservative element of our projections, the
price targets for the perceived winners and others don't appear to make
sense relative to current stock prices. While we find price targets
useful as a reality check, based on repeated requests for an
explanation, we suspect the data may be creating more confusion than
value. As such, we are removing the price targets from our weekly
table.
VALUATION AS A FUNCTION OF MARKET OPPORTUNITY - We don't know how high
is up. The stocks of the perceived winners in each segment appear to be
trading towards a valuation based on multi-billion dollar market
opportunities that may be attainable over the next 5 years. AOL is
trading above our price target of $65. Upside to EPS will drive up that
target. Still, this microanalysis misses the wide macro opportunity
range. Is AOL worth $43.3 billion relative to its ability to rule the
home market worldwide and more of the office market with the help of
acquisitions like Netscape? Our short answer is yes.
THE BIG PICTURE - The Internet companies appear to be taking mind share
and revenues from existing media and commerce companies, while creating
some additional value through efficiency of the Web. Thus, our
benchmark for valuation remains those non-Internet companies that
that have been around long enough to allow calculation of value based on
current earnings.
This week the market capitalization of the 50 companies in the ISDEX
index (excluding Cisco) is approximately $123 billion. This compares to
the top 20 media companies, which have a combined market capitalization
of approximately $364 billion. In the retail category, Wal-Mart's
market capitalization is approximately $167 billion.
MORE MERGERS MAKE SENSE - In our view, there is not enough room for the
over 75 Internet companies, by our last count, including some marginal
recent IPOs. The interesting aspect of Web math is that the valuations
of the leaders, AOL, Yahoo!, and Amazon, are so high that each could buy
almost anything and it would be additive. Without mergers, it may be
difficult for each to live up to current valuations. We wonder if the
AOL/Netscape deal will force faster consideration of other possible
combinations that might help create AOL-like, major networks/malls. If
the goal is to capture the greatest amount of audience activity and
related money, we can imagine a few powerful combinations. Yahoo! and
Amazon.com would appear the ultimate Web destination. Yahoo! and the
other networks are already trying to create easy-to-shop malls by
offering one-stop registration for credit card and shipping information.
The challenge with this model is that it does not assure quality
service, which we believe may require taking inventory. The counter to
this argument is that landlords have higher margins than e-tailers.
However, AOL has a blended margin of access and other revenues and has
the highest aggregate market capitalization. Accordingly, Amazon.com
and Excite might make a better marriage, because Excite might be more
willing to give up its name. Smaller transactions might make more
sense, such as Amazon.com buying Preview Travel, which would appear less
expensive than trying to enter the travel space itself.
HOLDING AND ACCUMULATING CORE POSITIONS - We have not given up on the
stocks, despite our anxiety over sharp trading spikes to new levels, as
the fundamental opportunity remains open-ended. We continue our focus
on AOL, which we expect is on target for a surprisingly strong December
quarter.
We are challenged by Yahoo!'s $20.7 billion valuation and, we would at
least sell enough stock to take our cost off the table. We compare this
with Disney, at $63.5 billion, and are at a loss to justify it. Yahoo!
seems quite capable of reaching past its current audience of over 25
million registered users to over 100 million people worldwide over the
next few years. In order to derive enough revenues and earnings to
justify this valuation, Yahoo! needs to capture much more of its users
time. It is inherently competing with AOL, Amazon.com and other
aggregators of content and commerce.
THE NEXT GENERATION OF WINNERS - A few companies appear to have been
more slowly impacted by the Internet stock craze. Most of these
companies are in close competitive battles, by our observation, spending
more on marketing and other investments in order to maintain or gain
market share. We expect the second place finishers in many categories
will still generate substantial earnings and deserve higher valuations
than current levels.
We would look to hold or buy some of the competitively challenged
stocks, where valuations have not scared us yet. Our BUY rated stocks
include CNET, Excite, E*Trade, Network Solutions, Preview Travel, and
SportsLine. Even here, given crazy market conditions, we would be
cautious.
CNET - We believe there may be upside to the December quarter, based on
merchant fees from Shopper.com, Computer.com and advertising
commitments. We believe site improvements will help overall traffic
growth for the December quarter. As visibility unfolds on CNET's
ability to generate commerce revenues and to demonstrate potential
earnings leverage, we would look to raise our estimates and price
targets further. Here, the stock continues to languish below our price
target of $67.50, which is based on an EPS estimate of $1.35 for 2001.
NSOL - The company is in the process of more aggressive marketing of its
primary and complementary services, which we believe can significantly
increase revenues per account. The stock appears to be moving past
concerns of potential new competitors, which we believe will not
materialize for many quarters, if not years. Even then, we expect NSOL
will remain the leader by a wide margin. Again, the stock is below our
price target of $77.50 is based on our 2001 estimate of $1.55.
E-Tailing Update -
HYPERLINK mailto:lauren_cooks_levitan@rsco.com
lauren_cooks_levitan@rsco.com
Traditional retailers reported mixed November sales results today with
specialty stores, discounters and mass merchants outperforming the
lackluster results of most department stores. We suspect that these
trends could lead the department stores to pull the trigger on extensive
promotional activities even earlier than in prior holiday periods
(particularly given that an unseasonably warm weather has most
department stores sitting on bloated inventories of winter apparel and
outerwear). To us, the message from the physical world is applicable to
e-tailers. Value-oriented retailers and strong branded retailers with
clean inventories are winning off-line and we believe will also win
on-line. While we have long felt Christmas 1998 would be the critical
season for e-tailing with sufficient mass market acceptance of the
distribution channel's legitimacy, we do not think the winners will be
wide-spread. As in the real world, the strongest brands will be the
happiest after all of the holiday dust settles.
With the stocks of most pure-play e-tailers and retailers with an
on-line effort (i.e., Books-a-Million) trading near their highs, we
continue to like Preview Travel, a company whose big seasonal quarter
should be Q1 rather than Q4. This week, the company unveiled numerous
improvements to its site designed to convert its myriad shoppers into
buyers. We expect to start seeing the benefits of these efforts as
early as Q1, helped by the ability to make selected offerings to
consumers to close the deal, among other new features. We believe that
if more consumers get comfortable with buying on-line this holiday
season, Preview Travel could benefit from a larger target market.
Rating 12/3 11/24 1-Wk 52-Wk Chg
Chg High 52Wk Hi
12/3- to 12/3
11/24 Pricee
Amazon AMZN BUY 189 * 210 1/3 -10% 233 1/8 -18.7%
CMG CMGI LTA 69 * 83 -17% 91 3/4 -24.5%
CNET CNWK BUY 45 * 54 -16% 74 1/2 -39.3%
Dig.River DRIV BUY 18 1/8 21 * -17% 32 -43.4%
Dialog DIALY MP 4 1/3 5 -15% 16 1/4 -73.5%
Dbl.Click DCLK MP 33 5/8 43 1/8 -22% 77 1/8 -56.4%
Ebay EBAY BUY 187 204 * -9% 234 1/8 -20.1%
E*Trade EGRP BUY 23 1/5 27 5/8 -16% 35 1/4 -34.2%
Excite XCIT BUY 49 * 49 1/8 0% 57 1/4 -14.0%
Gemstar GMSFT BUY 66 * 63 5/8 5% 68 1/8 -2.4%
Getty GETY BUY 16 4/5 14 20% 28 1/4 -40.5%
Lycos LCOS BUY 50 * 62 4/7 -19% 68 3/4 -26.5%
NetGravity NETG BUY 17 * 22 1/5 -20% 32 1/2 -45.4%
Network
Solutions NSOL BUY 59 3/8 70 -15% 82 3/8 -27.9%
NewsEdge NEWZ MP 7 7/8 7 * 2% 19 3/4 -60.1%
N2K NTKI MP 11 2/3 13 3/8 -13% 34 5/8 -66.2%
Onsale ONSL BUY 38 7/8 60 -35% 108 -64.0%
Preview
Travel PTVL BUY 16 17 -6% 44 -63.6%
Infoseek SEEK MP 32 7/8 33 * -2% 45 -26.9%
SportsLine
USA SPLN BUY 16 19 1/8 -16% 39 5/8 -59.6%
Yahoo! YHOO BUY 183 * 209 7/8 -12% 227 * -19.3%
Internet Stock
Index ISDEX 213.33 236.46 -9.8% N/A 5.4% (1)
NASDAQ Composite
Index COMQ 1954.33 1985.21 -1.6% N/A 22.1% (1)
To improve the alignment of the table:
1. Highlight the data.
2. Go to the Format menu and choose "Font"
3. Choose "Courier" and press "OK".
(1) Change based on last 12-month's performance.
Source: AT Financial Information and BRS Estimates
BancBoston Robertson Stephens maintains a market in the shares of
Amazon.com, CMG Information Services, CNET, Dialog, Digital River,
DoubleClick, Ebay, Inc., E*Trade, Excite, Gemstar, Getty, Infoseek,
Lycos, Microsoft, NetGravity, Netscape, Network Solutions, NewsEdge,
N2K, Onsale, Preview Travel, SportsLine USA, Yahoo! and has been a
managing or comanaging underwriter for or has privately placed
securities of Digital River, Ebay, Inc., E*Trade, Excite, Onsale, and
SportsLine USA within the past three years.
FOR ADDITIONAL INFORMATION, PLEASE CALL YOUR BANCBOSTON ROBERTSON
STEPHENS REPRESENTATIVE AT (415) 781-9700.
Unless otherwise noted, prices are as of Thursday, December 3, 1998.
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
BancBoston Robertson Stephens, the information upon which such opinions
and estimates are based is not necessarily updated on a regular basis;
when it is, 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. 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." BancBoston Robertson Stephens from time to time
performs corporate finance or other services for some companies
described herein and may occasionally possess material, nonpublic
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information contained in this Report and the opinions contained herein
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Copyright * 1998 BancBoston Robertson Stephens Inc. |
