BANCBOSTON ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
mailto:Keith@rsco.com
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February 19, 1999
The Web Report ˆ Volume 2, Issue #7
This week the NETDEX index closed at 586.67, down 11.1% from last week,
and up approximately 410.6% over the same period last year. The NETDEX
is down 27.2% from its peak of 806.3 in January. For comparison, the
NASDAQ ended the week down 6% from last week, and up 31.6% from the same
date last year.
ANOTHER TOUGH WEEK WITHOUT HOT NEWS ˆ Last week‚s big merger news from
USA Networks highlighted lost hopes of quick and easy takeouts by media
companies. This week, most stocks seemed to slip, impatiently waiting
for catalysts, while the broader market came under pressure. Given the
historical record, we believe that a buying opportunity may now again
exist for what we deem the best companies, Amazon and AOL.
Relatively hard hit over the last week were Lycos and TicketMaster
Online-CitySearch, and we would not be surprised if these stocks
remained volatile pending their deal closing.
Network Solutions still suffers, we believe, from confusion surrounding
potential competition, despite its widening lead and clarification on
limited competition that will be allowed under new rules. NSOL‚s stock
may suffer because of its substantial current earnings that may distract
investors from appreciating what we view to be the open-ended upside as
it sells more domain names and related services. The accelerating
growth in registrations reflects the proliferation of businesses and
individuals on the Web.
Within a few weeks, we should be refocused on fundamentals. Underlying
trends appear upbeat, with most companies we follow prepared to show
strong March-quarter results, in our opinion. For example, we expect
Amazon to show sequentially higher revenues, demonstrating that
e-tailing is becoming more of a habit for more people.
AOL CONTINUES TO SET THE PACE ˆ AOL‚s stock has demonstrated remarkable
resistance to the recent weakness in the group. The mass market
continues to move online, with AOL announcing record subscriber
additions of 1 million to 16 million members for the AOL service from
the end of December to February 9, less then half of the quarter. For
reference, AOL reported net additions of 1.6 million in the entire
December quarter. While we should expect some seasonal dip in pace by
summer, AOL‚s growth prospects, we believe, remain relatively
open-ended, with more people worldwide spending more time at home and at
the office on AOL services.
BROADBAND POSITIONING ˆ POLULARITY, POLITICS AND ECONOMICS ˆ For many
years, most AOL members will be busy and happy on telephone lines.
While greater consumer availability of cable modems may help spur the
effective roll-out of broadband access, the cable companies still need
to send a technician to each home, which remains an inconvenient
hurdle. Still, AOL needs to establish broadband partners now or at
least this year, in our view.
The telephone companies have already acknowledged that AOL can deliver
customers through an easier if not more economic route than trying to
market independently. We expect more deals with telephone companies
after GTE and Bell Atlantic to cover other geographies.
In the meantime, AOL and others are putting political pressure on the
cable companies, particularly at the local level, to require open
access. Local franchise approval is required for the AT&T and TCI
merger. Consumers have a history of demanding more from cable and using
the power of local community politics. We believe consumers have more
passion for AOL than MTV. E-mail is part of our daily lives while MTV
is just for fun. We wonder if AOL could get lucky with its regulatory
efforts, although regulatory debates could drag on for years. In the
meantime, we fear AOL has made few friends among cable companies, with
the possible exception of Time Warner.
We expect cable companies will also appreciate the economic argument.
Time Warner has offered access to its pipe for telephone service to
AT&T, soon to merge with TCI, which owns part of access competitor
@Home. Time Warner has its own online service, RoadRunner, but seems
open to swapping it out for a bigger brand. We expect Time Warner is
more likely to do an on-line deal with AOL, because it makes more
business sense. Time Warner has valuable media content, which AOL can
use. AOL seems likely to give a more generous cut of the revenues to
Time Warner than to @Home. While the negotiation seems to be dragging,
we have hope for a deal in 1999, with something possible sooner rather
than later. It‚s curious that AOL‚s current market capitalization of
$87.4 billion is greater than Time Warner at $85.8 billion.
E-Tailing Update ˆ mailto:lauren_cooks_levitan@rsco.com
Preview Travel - We are a bit disappointed, but not seriously disturbed,
by Preview Travel‚s announcement this week that President and CEO Ken
Orton is resigning to pursue other professional opportunities. Ken had
two other board memberships and has been active in the Internet
community. We can appreciate his desire to invest more time in the
space. Jim Hornthal, chairman and founder of the company, will act as
interim CEO, while Ken will remain on in a consultant capacity. Ken has
done a great job, in our view, positioning the company as an online
travel leader. Recently, the company has made major changes to make the
service easier to use. At this stage, it‚s almost a waiting game to see
when consumers will grow more inclined to book online. Maybe the model
will remain more dependent on advertising than transactions, but it
still holds considerable value, in our view. Preview remains acquirable,
with the replacement cost seeming near its current market
capitalization. This quarter we expect a modest positive surprise is
possible, but have not yet seen the behavioral shift and acceleration in
transaction revenues. We do not view Ken‚s departure as a sign of
anything we did not already know. We like the risk/reward profile on the
stock and believe timing remains the challenging question.
Regulatory Update - Just Say No To New Taxes - We do not expect any
taxes to be levied on Internet transactions over the next three years.
The Internet Tax Freedom Act, passed last October, prohibits the
imposition of new or discriminatory taxes on transactions made via the
Internet for three years. During this period, an advisory commission
appointed by congressional leadership will review and study ways to
fairly tax on-line commerce. The U.S. Conference of Mayors will likely
file a lawsuit by March 1st to prevent this commission from ever
meeting. The group believes the 16-person panel, which was to be
weighted with half pro-tax and half pro-laissez faire individuals, was
improperly selected and already favors a no-tax position. Proponents of
the Internet tax cite the competitive disadvantage faced by local
merchants, which must charge a sales tax to its customers. We believe a
tax on Internet transactions would slow, but not stifle e-tailing growth
in the near term. We believe consumers choose to shop on-line for its
conveniences, not just competitive prices.
E-tailing in the Fast Lane - The Internet is making it easier and
cheaper for consumers to buy many items, including automobiles.
According to J.D. Power and Associates, an industry recognized research
firm, 3.25 million cars were purchased in 1998 by consumers that used
the Internet to find product and pricing information. This number
represents 25% of the estimated 13 million personal use cars sold
annually in the United States. We believe the Web will have a dramatic
effect on the automobile industry by empowering consumers with better
information. The report states that, on average, buyers save $1,000.
However, many dealers claim to be partially making up for the loss in
margin through the incremental volume of customers coming from
Internet-related leads.
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.
This week the market capitalization of the 67 companies in the NETDEX
index is approximately $227.5 billion. This compares to the top 20 media
companies, which have a combined market capitalization of approximately
$468.1 billion. In the retail category, Wal-Mart‚s market capitalization
is approximately $180 billion.
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Rating 2/18 2/11 1-Wk 52-Wk
Chg
Chg High 52Wk Hi
2/11 - to 2/18
2/18 Price
Amazon AMZN BUY 89 1/2 109 7/8 -19% 199 1/8
-55.1%
Am. Online AOL SBUY 155 3/4 164 2/3 -5% 177 *
-12.3%
CMG CMGI LTA 100 5/8 112 -10% 155
-35.1%
CNET CNET BUY 110 129 * -15% 154 *
-28.9%
Dig.River DRIV BUY 29 1/5 36 7/8 -21% 61 3/8
-52.4%
DbleClick DCLK BUY 82 91 * -11% 114 5/8
-28.5%
Ebay EBAY BUY 235 1/8 239 * -2% 321
-26.8%
E*Trade EGRP BUY 39 1/5 48 * -19% 66 3/7
-41.0%
Excite XCIT NR 91 105 * -14% 125
-27.3%
Gemstar GMST BUY 60 1/3 63 1/8 -4% 69 5/8
-13.4%
Getty GETY BUY 19 2/3 20 -2% 28 *
-30.3%
Lycos LCOS BUY 84 1/4 103 * -18% 145 3/8
-42.0%
NetGravity NETG BUY 17 3/4 21 1/3 -17% 32 *
-45.4%
Netrk Sols NSOL BUY 142 158 -10% 260 3/8
-45.5%
NewsEdge NEWZ MP 9 1/3 10 3/8 -10% 19 *
-52.8%
N2K NTKI MP 13 1/4 14 1/8 -6% 34 5/8
-61.7%
Onsale ONSL BUY 33 37 5/8 -12% 108
-69.4%
Prv.Travel PTVL BUY 19 1/2 26 -25% 44
-55.7%
Infoseek SEEK MP 59 5/8 65 4/7 -9% 100
-40.4%
SprtsLnUSA SPLN BUY 37 4/7 40 1/8 -6% 50 *
-25.6%
TicketMaster Online
CitySearch TMCS NR 34 3/8 39 3/8 -13% 80 *
-57.3%
Yahoo! YHOO BUY 128 7/8 158 * -19% 222 *
-42.1%
NETDEX Index
NETDEX 586.67 659.71 -11.1% 806.3 -27.2%
KEBDEX Index
KEBDEX 730.62 827.81 -11.7% 1,043.1 -30.0%
NASDAQ Composite Index
COMQ 2,260.55 2,405.55 -6.0% N/A 31.6%(1)
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(1) Change based on last 12-month's performance.
Source: AT Financial Information and BRS Estimates
* BancBoston Robertson Stephens is acting as an advisor in the City
Auction transaction and as a result our rating of this stock
automatically goes to No Rating.
BancBoston Robertson Stephens maintains a market in the shares of
Amazon.com, Cisco Systems, CMG, CNET, Preview Travel, Digital River,
DoubleClick, eBay, E*Trade, Excite, Gemstar, Getty, Infoseek, Lycos,
NetGravity, Network Solutions, NewsEdge, N2K, ONSALE, Preview Travel,
SportsLine, TicketMaster Online-CitySearch, Yahoo! and has been a
managing or comanaging underwriter or has privately placed securities of
Digital River, eBay, E*Trade, Excite, NetGravity, ONSALE, Preview
Travel, TicketMaster Online-CitySearch and SportsLine within the past
three years.
For additional information, call your BancBoston Robertson Stephens
representative at (415) 781-9700.
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.
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FOR ADDITIONAL INFORMATION, PLEASE CALL YOUR BANCBOSTON ROBERTSON
STEPHENS REPRESENTATIVE AT (415) 781-9700.
Unless otherwise noted, prices are as of the close February 18, 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
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described herein and may occasionally possess material, nonpublic
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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
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Copyright * 1999 BancBoston Robertson Stephens Inc. |
