BANCBOSTON ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
mailto:Keith@rsco.com
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January 29, 1999
The Web Report ˆ Volume 2, Issue #4
This week, we are introducing our own broader index of Internet stocks,
including those companies we do not cover. The BancBoston Robertson
Stephens NETDEX Index includes companies, which are footnoted below, and
can be seen graphically on our site, www.internetstocks.com. We will
make an effort to update it more frequently than other indexes and try
to be as inclusive as possible.
This week, as of January 27, 1999, the NETDEX index closed at 734.30,
recovering 26.3% from last week‚s hit, and up approximately 624.3% over
the same period last year. For comparison, the NASDAQ ended the week up
5.6% over last week, and up 53.8% from the same date last year.
THE BIG GET BIGGER: After a short-lived correction last week, the
Internet stocks began to climb yet again, in response to strong December
quarter reports from AOL, Amazon.com, and eBay, and Yahoo!‚s acquisition
of GeoCities. Because we continue to believe that underlying
fundamentals remain better than ever, we continue to believe the
long-term trend for the stocks will be up, not down. However, now that
the majority of the group has reported, we believe there may be fewer
near-term catalysts for retail and other investors. After such a strong
holiday season, we expect sequential comparisons to the March quarter
will be good, but not as great as the December quarter. The group may
be helped by announcements of acquisitions at current or higher
valuations. Still, we expect the rush of IPOs and secondary offerings
will force investors to be much more selective.
GREENSPAN EVALUATES THE WEB ˆ We are greatly comforted that somebody
else shares our strategy of staying selective, but bullish on the Web
stocks, even at current valuation levels.
Federal Reserve Chairman Alan Greenspan said Thursday while addressing
the Senate budget committee, "The size of that potential market is so
huge that you have these pie-in-the-sky type of potentials for a lot of
different vehicles. Some of these small companies which have stock
prices going through the roof will succeed and they very well may
justify even higher prices. The vast majority are almost sure to fail.
That's the way the markets work in this regard." Maybe we‚re not
completely crazy.
MUSICAL CHAIRS GAME ACCELERATING ˆ After last week‚s announcement of
@Home buying Excite, we had big news with Yahoo! buying GeoCities this
week and Compaq spinning out Alta Vista. Clearly, scale is becoming
more critical to success. On this note, we are ending the week with
Amazon.com raising $1.25 billion in convertible subordinated notes.
Compaq announced plans to spin off Alta Vista though an initial public
offering, trying to take advantage of the current IPO climate and
potentially enable Alta Vista to grow faster on its own. In a big first
step, Alta Vista announced a technology agreement with Microsoft, under
which Microsoft will use Alta Vista‚s search capabilities to power MSN,
and Alta Vista will use Hotmail and future instant messaging on its own
service. In the meantime, Compaq is pursuing its own aggressive
e-tailing strategy, trying to compete more aggressively with other
manufacturers offering computer equipment directly on the Web.
YAHOO! BUYING GEOCITIES: Yahoo! is paying roughly $3.5 billion
valuation for GeoCities, which represents a premium of over 50% from the
prior day‚s close or 35% over GCTY‚s previous high of $84 per share. We
had been concerned that Yahoo! would not take advantage of its high
stock price for acquisitions, fearing a resistance to any changes in its
business model, which remains one of the Web's most attractive in terms
of current and future profitability, in our view. In this case,
GeoCities boasts almost equally high margins.
This appears to push Yahoo! further into becoming more of a network than
a portal. The challenge is to provide more reasons for Yahoo!'s huge
audience to spend more time and create opportunities for additional
advertising and commerce revenues. Community services were a missing
component, compared to AOL or even Lycos, which recently acquired
GeoCities smaller competitors. Even if GeoCities did not contribute
additional revenues, one might be able to justify the acquisition in
terms of its ability to feed more traffic into other parts of the Yahoo!
network, which are currently generating revenues. GeoCities traffic
appears quite additive, as Yahoo! had not been offering
build-your-own-home-page services.
GeoCities business model has been evolving. GeoCities has a core group
of people that create home pages with content of value to the rest of
the community. Most of its home pages may prove popular to an
individual or a small circle of friends and family. Traffic comes from
both inside the network and those visiting from outside, typically
finding pages through search engines, like Yahoo! It has appeared more
difficult to sell this inventory, given the questions of quality of
content mix. However, GeoCities has recently had more success turning
its more prolific homesteaders into merchants. Most sites provide
expertise on specific subjects. With a button link to Amazon.com, for
example, the homesteader and GeoCities are starting to share in fees
generated by sending leads to Web stores. Other examples might include
computer-related content referrals. We understand that these affiliate
programs are starting to show momentum.
This marks a major step in an acquisition strategy that could help
Yahoo! grow into its current valuation. The stock remains a monster.
INFOSEEK LAGGING AND LATE: In contrast to the pick-up, in the
competitive pace by Yahoo!, Excite, and Alta Vista, we wonder if
Infoseek‚s GO Network has a chance. Infoseek reported results this
week, with traffic lagging in anticipation of the major March quarter
launch of the new service.
AOL REPORTS RECORD QUARTER: AOL reported Q2 revenues of $960M and EPS
of $0.17, above our estimates of $918.4M and EPS of $0.13. EPS upside
was due in part to greater advertising and commerce revenues. Commerce
revenues exceeded $1.2B at retail, making AOL the largest Web mall, by
our estimate. If we had to own just one Internet stock, it would
continue to be AOL. We have been waiting awhile for more broadband deals
and have been rewarded with strong operating performance demonstrating
AOL‚s strong negotiating position, in our view. We believe we may be
close to the announcement of more deals, including cable. In the
meantime, we believe the announcement of a 2-for-1 stock split is
helping to keep the stock moving.
THE EMERGING FRANCHISES STEP UP INVESTMENT SPENDING ˆ The theme of the
week seems to be a step up in the pace by the leader through acquisition
and the emerging leaders through increased investment spending.
DIGITAL RIVER - Digital River reported revenues of $9.4M and a loss of
0.26 per share, above our estimate of $6.6M, and in-line with our
estimated loss of $0.27 per share. Based on these strong results, we
are raising revenue estimates going forward, but raising estimates for
R&D spending, resulting in larger loss estimates. We believe
investments in technology in 1999 will further widen the company‚s
competitive lead. We expect growth to be a function of new clients and
more volume through those clients as revenues shift from the physical
retail world to the digital retail world. We believe Digital River is
creating one of the larger e-business franchises.
NETGRAVITY - NetGravity reported strong Q4 revenues of $4.2 million,
demonstrating strength from its core licensing business with 23 new
AdServer customers. Its outsourcing business is emerging with 19 new
AdCenter customers. We expect the company to spend more going forward
to extend its ad targeting and ad bureau outsourcing capabilities. As
the leader in the Ad Management Software licensing business, we believe
NetGravity is currently in a position of strength to exploit the
apparent demand for outsourcing services. We are adjusting our model
going forward, raising estimates for both revenue and expenses, as the
increased spending yields incremental growth. We believe there will be
several leading companies in the Web ad management sector, and we
believe NetGravity is well-positioned to emerge as such.
SPORTSLINE - SportsLine reported $9.3M in Q3 revenues and EPS of
($0.51), basically in line with pre-announced results. SportsLine‚s
traffic was down modestly to 5.5M page views per day from 6.3M in Q3,
due to the NBA lockout. We expect Q1 traffic will be up based on the
NBA reinstatement, the Super Bowl, NCAA basketball and AOL deal. Also
announced yesterday, SportsLine will effectively be the exclusive sports
content provider within a new SportsChannel on Netscape‚s Netcenter. We
lowered our F1999 EPS to ($1.70) from ($1.58), to reflect higher
development and marketing costs expected. We maintained our F2000 and
F2001 EPS estimates. We believe the stock is poised for better
performance as we look to the first half for a pick-up in traffic and
potentially competitive position.
E-Tailing Update ˆ mailto:lauren_cooks_levitan@rsco.com
AMAZON ACCELERATES SPENDING: While Amazon.com had pre-announced
results, we were encouraged by news of continued strength in spending in
January, suggesting a positive sequential comparison for the March
quarter, counter to pervious concerns. Cumulative customer accounts
grew to more than 6.2M by the end of December, demonstrating brand
strength with manageable marketing costs, which remains the core of the
business model. Amazon continues to deliver a positive experience, as
confirmed by repeat business representing more than 64% of orders placed
during the quarter. If we looked at the core book business, removing
investment spending for other product categories, Amazon has already
achieved profitability. We believe this comes as a surprise to many.
Now the challenge is to invest more through this winning combination of
brand strength and strong fulfillment capabilities. This is not a game
of price, in our view. We wonder if the returning customers even think
much about price. In the race to build capacity we expect the company
will invest heavily in infrastructure, distribution capabilities,
inventory, marketing, and headcount. Accordingly, it just added
substantially to its resources by just raising approximately $1.25B in
4.75% Convertible Supordinates Notes, due in 2009 and convertible into
Amazon common stock, at $156.05 per share, representing a conversion
premium of 27% over yesterday‚s closing price. We expect this offering
will be additive to earnings.
EBAY DEMONSTRATES THE POWER OF PROFITABILITY: Gross merchandise sales
were $307M, up 57% sequentially, with eBay reporting $19.5M in fee
revenue and EPS of $0.07. eBay grew its registered user base
substantially to more than 2.1M in Q4 from 1.2M in Q3, with over 13.6M
auctions hosted in Q4, up from 9.2M. Despite concerns expressed
recently, fraud occurs in a very small percentage of transactions.
Programs initiated by the company, combined with the self-regulating
nature of the community, appear to be sufficient to further minimize
this issue. While there has been continued competitive noise, in our
view, eBay‚s brand continues to demonstrate much greater momentum. We
believe eBay‚s Q4 results highlight the company‚s dramatic growth
potential and extraordinarily profitable business model among many
profitless Internet peers. In the offline world, the market for
auctions, garage sales, flea markets, and classified purchases exceeds
$100B in the U.S. alone. The biggest catalyst for the stock appears to
be the announcement of a 3-for-1 stock split.
INTRODUCING THE NETDEX - The NETDEX Index includes the following
companies: 24/7 Media (TFSM-$38), Amazon.com (AMZN-$122 7/8), America
Online (AOL-$174 7/16), @Home (ATHM-$121 7/8), Axent Technologies
(AXNT-$34 5/8), Broadcast.com (BCST-$180), Broadcom (BRCM-$141),
Broadvision (BVSN-$41), Carreker-Antinori (CANI-$6 1/5), CDNow (CDNW-
$22), Check Point Software (CHKPF-$47 13/16), CMGI (CMGI-$115:30) CNet
(CNET $91 1/8), Concentric Network (CNCX $47 *), Cybercash (CYCH $16
3/8), Cyberian Outpost (COOL $25), Cylink Corporation (CYLK -$3:17),
Dialog Corp (DIALY $5 *), Digital River (DRIV $50 *), Doubleclick (DCLK
$94 7/8), EBay (EBAY $292 5/8), E*Trade Group (EGRP $99 *), Earthlink
Network (ELNK $79 5/16), Egghead.com (EGGS $16 1/8), Excite (XCIT $116),
Exodus Communications (EXDS $113 *), Fundtech Ltd (FNDTF $23 1/16),
Geocities (GCTY $117 *), Harbinger Corporation (HRBC $6), IDT
Corporation (IDTC $15), Infoseek Corporation (SEEK $83 15/16), Inktomi
(INKT $68), Intuit (INTU $86 1/16), ISS Group (ISSX $62 15/16),
Knight/Trimark Group (NITE $43 1/8), Lycos Inc (LCOS $123 1/8),
Mindspring Enterprises (MSPG $103), N2K (NTKI $15:28), Netgravity (NETG
$26 13/16), Netscape Communications (NSCP $73 5/8), Network Solutions
(NSOL $215), Network Associates (NETA $54 11/16), Onsale (ONSL $46
9/16), Open Market (OMKT $12 7/8), Open Text Corporation (OTEXF $22),
Peapod (PPOD $7 3/16), Pilot Network Services (PILT $13), PSINet (PSIX
$31 7/8), Realnetworks (RNWK $67 3/8), Secure Computing Corporation
(SCUR $23 1/16), Security Dynamics Technologies (SDTI $24 15/16),
Beyond.Com (BYND $24 *), Sportsline USA (SPLN $35 *), Spyglass (SPYG $13
9/16), Sterling Commerce (SE $42 15/16), Telebanc Financial (TBFC $41
*), Transaction System Architects (TSAI $47 7/8), USWeb Corporation
(USWB $29 15/16), Verio (VRIO $30 *), Verisign (VRSN $93 *), Wavephore
(WAVO $8:10), Worldtalk Communications Corp (WTLK $5 1/16), Yahoo! (YHOO
$367 *).
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Rating 1/28 1/21 1-Wk 52-Wk Chg
Chg High 52Wk Hi
1/21- to 1/28
1/28 Price
Amazon AMZN BUY 122 7/8 106 16% 199 1/8 -38.3%
Am.Online AOL SBUY 174 4/9 141 24% 176 -0.9%
CMG CMGI LTA 116 90 1/4 28% 155 -25.2%
CNET CNET BUY 91 1/8 83 10% 108 -15.6%
Dig. River DRIV BUY 50 3/4 37 5/8 35% 61 3/8 -17.3%
Dialog DIALY MP 5 1/4 5 1/4 0% 16 1/4 -67.7%
DbleClick DCLK BUY 94 7/8 98 -3% 114 5/8 -17.2%
Ebay EBAY BUY 292 5/8 181 3/4 61% 321 -8.8%
E*Trade EGRP BUY 99 1/2 77 3/8 29% 108 -7.9%
Excite XCIT NR 116 85 7/8 35% 113 7/8 1.9%
Gemstar GMSTF BUY 58 4/7 57 1/8 3% 69 5/8 -15.9%
Getty GETY BUY 19 3/8 19 2% 28 1/4 -31.4%
Lycos LCOS BUY 123 1/8 117 5% 145 3/8 -15.3%
NetGrav. NETG BUY 26 4/5 19 3/8 38% 32 1/2 -17.5%
NetSol. NSOL BUY 215 169 1/4 27% 260 3/8 -17.4%
NewsEdge NEWZ MP 11 5/8 11 3/8 2% 19 3/4 -41.1%
N2K NTKI MP 15 7/8 14 5/8 9% 34 5/8 -54.1%
Onsale ONSL BUY 46 4/7 42 3/8 10% 108 -56.9%
PrevTravel PTVL BUY 24 3/4 23 1/4 6% 44 -43.8%
Infoseek SEEK MP 84 61 4/7 36% 100 -16.1%
SprtsLnUSA SPLN BUY 35 3/4 30 19% 39 5/8 -9.8%
TicketMaster Online
CitySearch TMCS BUY 64 55 1/4 16% 80 1/2 -20.5%
Yahoo! YHOO BUY 367 3/4 265 39% 445 -17.4%
NETDEX Index
NETDEX 734.30 581.25 26.3% N/A 624.3% (1)
KEBDEX Index
KEBDEX 927.09 726.11 27.7% N/A 810.2%
NASDAQ Composite Index
COMQ 2,477.34 2,344.72 5.7% N/A 53.8% (1)
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Rating Definitions: The following are basic definitions for our
recommendation ratings.
Strong Buy ˆ Rating for a stock, which we believe could have
significant, positive price movement near-term. Therefore, we would be
aggressive buyers of the stock.
Buy ˆ Rating for a stock, which we recommend buying, however believe
there may not be near-term news or events to move the stock price.
Long-Term Attractive ˆ Rating for a stock, which we believe could have
long-term value, however we would not necessarily recommend buying.
Market Performer ˆ Rating for a stock, which we believe will perform at,
or below, market levels.
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, Ticketmaster/CitySearch,
and Yahoo! and has been a managing or comanaging underwriter for or has
privately placed securities of Digital River, Ebay, Inc., E*Trade,
Excite, Onsale, SportsLine USA and Ticketmaster/CitySearch 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 Thursday, January 21, 1999.
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
information regarding such companies. This information is not used in
the preparation of the opinions and estimates herein. While the
information contained in this Report and the opinions contained herein
are based on sources believed to be reliable, BancBoston Robertson
Stephens has not independently verified the facts, assumptions and
estimates contained in this Report. Accordingly, no representation or
warranty, express or implied, is made as to, and no reliance should be
placed on, the fairness, accuracy, completeness or correctness of the
information and opinions contained in this Report. BancBoston Robertson
Stephens, its managing directors, its affiliates, and/or its employees
may have an interest in the securities of the issue(s) described and may
make purchases or sales while this report is in circulation. BancBoston
Robertson Stephens International Ltd. is regulated by the Securities and
Futures Authority in the United Kingdom. This publication is not meant
for private customers.
The securities discussed herein are not FDIC insured, are not deposits
or other obligations or guarantees of BankBoston N.A., and are subject
to investment risk, including possible loss of any principal amount
invested.
Copyright * 1999 BancBoston Robertson Stephens Inc. |
