11:33am EST 8-Jan-99 BancBoston Robertson Stephens (Benjamin, Keith 415-693-3
The Web Report - Volume 2, #1 (Page 1 of 2)
BANCBOSTON ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
keith_benjamin@rsco.com
January 8, 1999
The Web Report -- Volume 2, #1
This week, as of January 7, 1999, Internet.com's ISDEX index closed at 306.66,
up 6.6% from the end of last week and up approximately 211.9% over the same
period last year. For comparison, the NASDAQ ended the week up 6% over last
week and up 48.9% from the same date last year.
DON'T FIGHT THE TAPE -- I have always been a superstitious analyst, looking for
signs, rational or not, for market and stock direction. Amazon's stock,
splitting 3-for-1 this week, showed remarkable resilience from threatening
revenue news, suggesting a very healthy demand for Amazon and for the entire
group of stocks, even at valuations that appear to reflect very high
expectations. Amazon reported December quarter revenues of $250 million and
the addition of 1 million new customers. By any measure outside the Internet,
this represents outstanding growth, in our view. However, we had feared that
investor expectations had risen well above those numbers, with the circular
logic of explaining the stock price rise by assuming that the numbers would be
as huge. We had hoped to buy the stock cheaper on the announcement and it
appears we were not alone.
Last week we were more concerned about stocks languishing after reporting
season. The fact that Amazon's stock fell very briefly, ending the week up
48%, we believe is the clearest sign we have seen for continued strength in
this stock group, even if company reports don't exceed the high end of inflated
expectations.
STOCK STRATEGY -- We continue to suggest building and holding a portfolio of
the biggest and best, focusing on AOL and Amazon, and a select number of
emerging franchises, with a more opportunistic trading approach. This week, we
would focus on Excite, CNET, and SportsLine. These are stocks that have not
recovered with the group since the summer. We expect investors will be looking
a bit deeper within the group for an opportunity and believe these companies
can attract more attention with relatively upbeat reports. Further, we believe
each will benefit from accelerating advertising spending in 1999 as ads become
more targeted, which we expect will emerge as a new theme. Last year,
investors were entranced by the buying power of the new on-line consumer. This
year, we believe advertisers will be more aggressive in buying banners,
sponsoring sites, and trying to entice Web users into becoming customers,
either on-line or off-line.
SELL ME A CUSTOMER -- General and subject specific Web networks attract
audiences by offering content, convenience and other services. The most
valuable networks, in our view, can be measured by how many people return on a
regular basis. As more users move past browsing to registering for particular
brands and services, networks are beginning to build databases of information
that are now just beginning to be exploited. We expect more traditional brand
advertisers to pay networks for the delivery of customers. We are already
seeing more advertising on a pay-per-lead-basis, rather than just a pay-per-
impression basis. We believe this trend will benefit the leading networks,
like Yahoo! and Excite, and advertising management companies, like NetGravity
and DoubleClick.
EXCITE IS PIONEERING WEB DIRECT MARKETING -- Excite has battled the big Yahoo!
brand by investing more aggressively in buying customers, including a major
deal with Netscape, and by sharing revenues with content suppliers in order to
create a network where users want to spend more time and money. Excite, though
the acquisition of MatchLogic, is pioneering Web advertisement targeting.
MatchLogic collects data from the Excite network and others on behalf of its
advertising customers, analyzing usage patterns to match people with the right
ads. We believe the Internet is being used increasingly as an information
source to make purchases on and off the Web. Well-placed advertisements
provide value to both customers and brands. Excite appears ideally positioned
with both a strong network and the right technology. We expect another solid
quarter will help the stock catch up with the group.
ATTENTION CNET SHOPPERS - CNET changed its NASDAQ symbol to CNET, which seems
to make sense to us. The company also disclosed that computers.com and
shopper.com provided leads that generated $80 million in revenue for its 70
participating merchants in the December quarter. The number of leads generated
doubled in the month of December over the month of September. This is a rather
impressive start to this relatively new program.
When CNET reports Q4 results later in the month, the company may disclose the
actual number of leads generated, which we estimate exceeded the September
quarter run rate of over 100,000 per day, totaling almost 10 million. We
estimate the price per lead ranges roughly around $0.50. The deals vary, but
the majority of leads provide incremental revenues. As such, we expect there
may be some upside to our estimates of $16.5 million in revenue and $0.12 of
EPS for Q4.
While we would expect some seasonal slowdown in the lead generation pace in Q1,
we expect continued growth in 1999. In addition, we believe the sales rate of
Q4 will enable higher prices as most of the initial contracts expire in March.
While it is still early to pinpoint estimates, this business could provide
dramatic upside to our estimates. To put the opportunity in perspective, we
believe lead fees could approach 10% of the value of a transaction, consistent
with a typical retailer's marketing spending. After the fast start, we would
imagine CNET could provide enough leads to allow its merchants to generate $1
billion in sales, implying $100 million in revenue for CNET. While further
investments in building the core CNET service and audience could offset some of
the impact of commerce in 1999, we believe CNET's earnings and stock hold
considerable upside.
SWOOSH FOR SPORTSLINE -- BASKETBALL IS BACK -- Between the NBA and NCAA, Q1
should be busy for SportsLine, after a challenging Q4, as we see it. We
believe SportsLine is just beginning to demonstrate the value of its audience.
This week SportsLine and Amazon.com announced an agreement under which
Amazon.com will become SportsLine's online retail partner in a newly launched,
co-branded store on the CBS SportsLine site. Sports-related books, videos and
music will be highlighted in the new co-branded store. SportsLine USA will
build and maintain the co-branded store and will promote it throughout its Web
site. We believe this is a multi-year deal, with Amazon paying SportsLine per
lead generated beyond minimum performance requirements, and is reflective of
the success merchants and Web publishers are having with these models. We
estimate this could yield more than $1/2 million in annual revenues to
SportsLine. We find the stock very attractive at current levels, which already
appear to reflect the probability of a difficult Q4, but not yet the
possibility of a strong Q1.
E-Tailing Update -- lauren_cooks_levitan@rsco.com
This week, traditional retailers reported generally strong sales results for
the just-ended holiday season. Specialty retailers, in particular, led the
pack, helped by brisk sales during the final days of December. While consumers
were certainly spending during Q4, we expect the most stunning percentage gains
(albeit typically on smaller sales bases) are likely to be reported by e-
tailers who benefited not only from strong consumer confidence, but also from
unprecedented levels of consumer trial of online shopping.
AMAZON GROWING AS FAST AS IT CAN BUILD CAPACITY - The company pre-released Q4
sales results of approximately $250 million, roughly 43% above our estimate of
$175 million. The company appeared to struggle a bit to get there, noting
higher fulfillment costs and more aggressive pricing as two of the reasons for
decreased margins, suggesting that loss estimates will be in line with our
estimates despite higher revenues. Due to a higher mix of music and video
products, which carry lower gross margins than books, we are not surprised by
the margin shortfall. At this stage, we appreciate that the priority is to
spend aggressively to build the brand and prepare for even higher volumes,
which we expect can yield operating upside as the business scales. The company
announced the opening of a new seven-acre distribution center in Nevada that,
while increasing inventory levels, is expected to decrease delivery times to
the Western US by a day. Amazon just started generating higher margin revenues
by delivering leads to other stores. However, we believe the key will be to
maintain the highest levels of customer service and fast fulfillment, both for
Amazon's and other products. We believe the Amazon brand can attract the
customers, although it is too early to accurately estimate the eventual size of
the Amazon mall and the mix of Amazon vs. non-Amazon merchandise.
AOL REMAINS THE BIGGEST WEB MALL: AOL reported that its members spent
approximately $1.2 billion on-line during this year's holiday shopping season.
The heaviest day of shopping, December 17th, generated more than $36 million in
e-tailing sales. Some 1.25 million new AOL members shopped on-line. The Toys,
Kids and Babies shopping channels ranked #1, followed closely by the Apparel
channel. We believe the $1.2 billion in e-tailing sales generated by AOL's 15
million customers makes our estimated $3 billion in holiday season e-tailing
sales seem very achievable. We believe the December quarter will be the best
in AOL's history across all metrics, and would continue accumulating the stock
at these levels.
SHOPPING TRENDS: In the latest installment of Media Metrix's holiday e-
commerce series, overall traffic to online shopping sites fell 22% in the week
before Christmas, compared to the prior week, but still up from November.
Given the need to allow for shipment, this makes sense, leaving the last minute
shopping to the stores. Compared to November traffic, visitation to toy sites
increased 24%, visitation to books/music/movie sites increased 32%, visitation
to apparel sites increased 10% and visitation to department store sites
increased 20%.
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 have been around long
enough to allow calculation of value based on current earnings.
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