Merrill Lynch reinstates AMZN coverage with target of $150 !!! Mr.
Blodget has taken over the post there and advised customers to buy
into big three... Enjoy!
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07:06am EST 10-Mar-99 Merrill Lynch (Investor Support) AMCALL AOL YHOO AMZN
RESEARCH SUMMARIES:Morning Notes Summary
ML++ML++ML Merrill Lynch Global Securities Research ML++ML++ML
RESEARCH SUMMARIES
Morning Notes Summary
Investor Support
10 March 1999
Internet / Electronic Commerce
Overview of Our Internet Investment Philosophy (Bulletin Available)
o We regard the Internet as a global mega-trend, along the lines of the
printing press, the telephone, and the computer, that is changing the way
companies and people communicate, research, buy, sell, and distribute goods and
services, and spend leisure time. We believe it will affect multiple industry
sectors in the world economy over the next decade.
o We believe the Internet will continue to cause the creation and/or
redistribution of hundreds of billions of stock market capitalization in a
variety of sectors-with big winners and big losers.
o We recommend that investors develop a comprehensive, industry-by-industry,
Internet investment strategy, whether direct or indirect, offensive or
defensive. The aim of such an exercise would obviously be to move money 1)
where the growth is, and/or 2) out of the way.
o We agree that the leading pure-play Internet stocks look very expensive,
but we think there are good reasons to own small positions in them anyway.
Among these is the belief that the real "risk" in such open-ended opportunities
is not losing money, but missing big upside.
o We recommend that aggressive investors allocate a small percentage of
capital to a basket of high-quality Internet stocks, such as America Online
(AOL, D-1-1-9, $89 7/8), Yahoo! (YHOO, D-2-1-9, $167 5/16) , and Amazon.com
(AMZN, D-2-1-9, $129 15/16). In deference to the dizzying valuations, we would
not "bet the farm" on any one stock or the sector as a whole.
o We believe the least risky Internet investments are also the most
expensive-the sector leaders. If the "bubble" ever bursts, we believe that
what will be left are a few fast-growing companies with big market
capitalizations-and a lot of wreckage.
o We believe that the Internet stocks will continue to be sentiment-driven
and extraordinarily volatile-and there are clearly favorable and unfavorable
times to buy them (although the only mistake thus far has been to stay
permanently on the sidelines). In the event of additional "boom-and-bust"
cycles (e.g., January), we would actively manage risk exposure.
o We believe that the leading Internet stocks will remain extraordinarily
expensive until the fundamentals beneath them weaken or stop improving (at
which time, we expect significant sector-wide multiple contraction). We do not
believe that valuation alone will bring the stocks down.
(H. Blodget)
America Online Inc (Aol; $89 7/8; D-1-1-9)
Assuming Coverage With a Buy/Buy Rating (Bulletin Available)
99E $0.33; 00E $0.51; Market Cap.: $95,087
o We are assuming coverage of America Online with a Buy/Buy rating and 12-
month price objective of $110.
o America Online is the largest and most powerful company in the consumer
online industry, a market that we expect to grow at better than 50% per year
for the next five years. In our opinion, AOL could extend its leadership
position over this period.
o The primary risks in owning AOL, in our opinion, include 1) valuation, 2)
the potential inability of the company to maintain its leadership in a
broadband world, and 3) continued focus and execution.
o AOL's biggest long-term issue is still a vague broadband plan with regard
to the cable providers, which we expect will be major providers of broadband to
the home. AOL has made good progress on the overall broadband front,
however.
o We expect AOL to increase earnings per share at least 50% per year for the
next several years. We also believe that our estimates are conservative.
(H. Blodget)
Amazon.Com (AMZN; $129 15/16; D-2-1-9)
Still Long-Term Upside...(Bulletin Available)
99E d$0.90; 00E d$0.25; Market Cap.: $20,009mn
o We are reinstating coverage of Amazon.com with an Accumulate/Buy rating
and a 12-month price objective of $150.
o Amazon.com is the clear leader in business-to-consumer online commerce, a
potentially enormous market growing at better than 200% per year.
o Amazon.com's valuation is aggressive, but we believe a small position can
be justified in light of the company's leadership position and long-term
opportunity. We believe the stock will continue to be extremely volatile, but
trend higher long term.
o Amazon.com is one of the fastest-growing companies in history. Five years
ago, it consisted of a man and a plan. Now, it has 6 million customers and a
$1 billion run-rate.
o In our opinion, Amazon.com is investing money, not losing money (an
important distinction). Management is committed to building long-term
shareholder value at the expense of the near-term bottom line-an unsettling
but, in our opinion, smart strategy.
(H. Blodget)
Yahoo! (YHOO; $167 5/16; D-2-1-9)
Assuming Coverage with an Accumulate/Buy Rating (Bulletin Available)
99E $0.37; 00E $0.48; Market Cap.$39,234mn
o We are assuming coverage of Yahoo! with an Accumulate/Buy rating and a 12-
18 month price objective of $225. We believe Yahoo! is one of the highest-
quality companies in the online industry, and we believe its stock should be a
core holding in an Internet portfolio.
o Four years ago, Yahoo! had two employees, no users, and no revenue.
Today, it is a global corporation with 18 international properties, 50 million
monthly users, $300 million in run-rate revenue, and $100 million in annualized
profit. We believe, moreover, that the vast majority of Yahoo!'s opportunity
lies ahead of it, not behind it.
o Yahoo!'s stock is expensive by any conventional measure (100X run-rate
revenues), but in our opinion, viewed in the right context, it is not as
expensive as it seems. The company benefits from the "network" effect, is
already generating 300% returns on invested capital, and, in our opinion, could
ultimately have a 30% profit margin. We also believe that our estimates are
very conservative.
(H. Blodget)
(AOL) MLPF&S was a manager of the most recent public offering of securities of
this company within the last three years.
(YHOO, AMZN) 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 1999 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. |
