Please support cowen.com the following is there bullish case for DCLK.
We've Seen The Future…It Is DoubleClick
We upgraded DoubleClick on Thursday last
week and thought we would include the rationale
for that upgrade in The Internet Capitalist.
Since we don't give out the Strong Buy rating
with much frequency in our space, we wanted to
provide the (somewhat) lengthy explanation in
this forum, hoping that our enthusiasm is backed
by sound judgment and due diligence.
After digesting a series of announcements from
DoubleClick, speaking extensively to
advertisers, agencies and Web publishers, and
meeting with management in a series of
meetings over the last month, we've come away
with much more confidence that DoubleClick is
well on their way to establishing themselves as
the leading Internet advertising services
company out there, with a great technology
(DART), a huge first mover advantage, a critical
mass of advertisers and Web publishers, and
some great new products that are well timed to
take advantage of the most important trend in
Internet advertising today: targeting.
The Network, DART/Closed Loop, And
Targeting Are Why We're Upgrading
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Though we go into much greater detail in the rest
of the note, we note three key reasons for the
upgrade: (1) the network business is as strong as
ever and with the recent decision to open up the
DoubleClick Network on a non-exclusive basis,
we expect inventory to increase smartly in 1999,
with a nice pickup in revenue in a few quarters
as well; (2) the DART business has really turned
a corner, and we believe it could well become
the de-facto standard for ad serving. With
DoubleClick's new product suite Closed Loop
(DART for Advertisers, Boomerang, DataBank)
out of Beta or very close to release, we believe
that DART revenue could show nice increases
throughout 1999; and (3) that targeting will
become increasingly important to Internet
advertisers in 1999. Internet advertisers are
demanding better results from their online media
buys than many are currently getting, and though
content-specific targeting (like sponsorships) has
its merits, getting the right message to the right
person at the right time (which is the real reason
the Internet has been hyped as the perfect
advertising medium) can only really be done via
behavioral targeting, which is what DoubleClick
is all about.
Importantly, the power of positive feedback
loops and increasing returns power each of their
products, with success in the Network side
begetting success in the DART business, which
powers the new Closed Loop products, which
helps DoubleClick target advertising for their
clients to an even finer degree. And based on our
conversations with the advertising community (a
list of companies we've contacted appears at the
bottom of this first call note), we think
DoubleClick has reached that critical mass point
in their development. So just like no MIS
manager ever got fired for buying IBM in the
1980's or Microsoft in the 1990's, in the
advertising world, DoubleClick has become the
“safe” buy, with a product recognition and
service reputation that is second to none.
The DoubleClick Network Goes “Non-exclusive”
This quarter, DCLK has expanded their network,
for the first time allowing sites in on a non-exclusive
basis (previously the growth of the
network was somewhat limited by the fact that
DCLK required exclusive ad sales
representation). This is a significant shift from
both a tactical and strategic point of view, since
it immediately increases the reach of the
DoubleClick network (now at #5 with a 48%
reach of Internet users against AOL at 54%,
Microsoft at 52%, Yahoo at 51%, and Lycos at
49%) and eventually could add enough inventory
to further enhance DoubleClick's targeting
efforts. After all, the larger the reach, the greater
number of “slices” DoubleClick could offer, say
P&G.
Greater Reach Equals More Inventory Equals
More Revenue, But Wait…There's More
Increased reach makes the DoubleClick Network
a better buy for advertisers and a larger network
gives DCLK greater access to more revenue, the
two most important (and immediately positive
impacts of expanding the Network to non-exclusives).
Remember, however, that revenue
is enhanced also from the fact that the Network
is creating more targeted inventory for which
DCLK can charge a higher CPM. This even in a
decreasing pricing environment (average
industry-wide CMP's in Q498 dropped to
$35.13, down 8% y/y and 3% q/q according to a
study by AdKnowledge). Prior to the expanded
network, 29 out of the 30 sites that wanted to be
part of the DoubleClick Network were not
allowed in; since the non-exclusive
announcement, 15 out of the 30 Web publishers
that want to give ad inventory to DoubleClick
are accepted.
Now DoubleClick Can Get Paid To Monetize
Leading Sites' Unsold Inventory
From a publisher perspective, the new non-exclusive
arrangement makes lots of sense; they
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can leverage the DoubleClick Network to
monetize their “unsold” inventory (keep in mind
that many sites, especially heavier trafficked
ones, sell less than 20% of their advertising
inventory). The non-exclusive policy also
addresses a key perceived negative; that
DoubleClick would never be able to get
inventory from the very large sites (portals,
popular content destinations, etc.) because these
folks would never want to out-source their
advertising sales function. The expanded, non-exclusive
network answers this question, since
many sites (like, for instance Alta Vista, find that
DoubleClick can monetize pieces of their
inventory much more efficiently (read: higher
CPMs) than they can alone. After all, why
wouldn't, say, USA Today (an actual non-exclusive
Network customer) want to hand over
inventory they haven't been able to sell?
In toto, we believe that the expanded, non-exclusive
network represents a win-win-win
situation, for advertisers, publishers, and
DoubleClick.
DoubleClick DART Has Really Come Into Its
Own Over The Past Few Quarters
When DoubleClick went public in early 1998,
we thought that DART could possibly reach
perhaps 10% of total revenue by the end of 1998.
We know now that it reached 17% of revenue,
growing much more quickly than we had
originally anticipated. Its acceptance as the de-facto
solution in the advertising serving space
has continued apace. And as we have talked
about in past notes, the DART technology
continues to offer best-of-breed solution for sites
that want to serve Internet advertisements
themselves. In 1998, DCLK added something
like 230 new DART-only customers, 90 of
which were competitive conversions (from
NetGravity, Accipter, Adforce, etc.). Keep in
mind that DoubleClick achieved this 230 wins
milestone by only targeting web sites that were
rumored to be unhappy with their ad serving
solution.
In 1999, DoubleClick has suggested that the kid
gloves come off; the DART sales force is
aggressively targeting competitor's customers
and, according to our sources, they are already
successfully converting more customers to the
DART solution. Specifically, we are told that
the DART sales force is now targeting the top
100 Web sites out there (currently 21 are already
DART clients) and are “talking” to 70% of them
and are at proposal stage with 50% of those
accounts.
DoubleClick's New Product Suite, Closed Loop,
Could Be Huge
Officially announced late in 1998, this product
and service suite includes Dart for Advertisers
(simply the DART technology for the buyers of
online media), Boomerang (a tool that allows for
“re-targeting” of users that have already been
exposed to an advertising message), and
Databank (a data mining/consulting service that
helps increase advertising effectiveness). The
Closed Loop product suite essentially provides
the tools necessary for DoubleClick clients to
achieve far greater targeting capabilities with
their ad messages. As for timing, Dart for
Advertisers officially came out of beta a few
weeks ago, Boomerang is expected to be out of
beta early in Q2, and DataBank is expected to
rollout sometime soon (timing is still a bit
fuzzy).
Why Do We Think The Closed Loop Suite Is So
Important?
We think the Closed Loop products/services
increase the revenue opportunity for
DoubleClick significantly. And when combined
with the “de-facto” industry-standard solution
imprimatur we think DART will achieve over
the next few quarters, we believe the revenue
opportunity could be far larger than the Street
currently understands. Perhaps even more
importantly, the company believes that Closed
Loop (and Boomerang in particular) could be the
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most profitable revenue stream they have when it
matures. Today, DoubleClick has over 15
DART for Advertiser clients (on both the agency
side, like SIG, MediaSmith, and US Web/CKS,
as well as individual advertisers like Dell and
Travelocity), and we have every reason to
suspect that the list will grow nicely throughout
the rest of 1999.
Boomerang Should Be A Real Hit With E-Commerce
Sites
Though Boomerang isn't yet out of Beta testing,
we think the potential market could be sizable,
considering its functionality and applicability.
Boomerang offers the ability to reach and re-target
customers that have already visited a Web
site. Once a visitor leaves, say, the Dell.com
site, with the use of Boomerang, that user can be
marketed to again by Dell if they are visiting any
of the 6,400+ unique sites within the
DoubleClick Network. This is an enormous
benefit to e-commerce sites in particular, since it
allows Dell.com to segment their audience based
on behavior (users who haven't been to
Dell.com; frequent Dell.com users; users who
have visited Dell.com's home page only but
haven't drilled down for more information; etc.)
and then market to them individually depending
on, in this example, how much they used the
Dell.com site and what they used it for (e.g.
purchase or information retrieval). This is an
incredibly powerful customer acquisition and
retention tool for e-commerce sites, since they
depend on their ability to target their customers
and establish a ongoing relationship with them.
We expect both e-commerce sites as well as
brand advertisers will find this product
extremely compelling.
There Are Other Important New Products And
Services Coming
Other products should also provide some nice
catalysts in the next few quarters. We expect
DART for E-commerce will launch in Q2 (this is
essentially DART combined with Boomerang);
we know that Double Click is already working
with three E-commerce players (one of which is
Dell.com). By Q4, DoubleClick expects that
DART for E-commerce will incorporate back-end
capabilities (like integration with an e-commerce
site's inventory and logistics
systems), so that E-commerce sites can instantly
determine the economics of offering coupons,
promotions, and other incentives to customers
that have, say, purchased a Dell laptop. Since
only 2% of visitors to an E-commerce site
actually make purchases, this back-end
integration makes enormous sense, since it
allows e-commerce sites to manage the
conversion of browsers into buyers (hopefully
driving conversion rates up).
International Is A Market Opportunity That
Should Really Hit Its Stride In 1999…
DoubleClick has made aggressive investments in
building out a direct sales force internationally,
since it believes that (1) on a growth rate basis,
Internet users worldwide are growing even faster
than in the US, (2) as much as 30% of domestic
sites' traffic is coming from overseas and is
wasted since it can't be monetized by US
marketers and, (3) amassing this international
inventory into one media buy could result in
significant revenue opportunities from
international marketers wanting to advertise to
International Web surfers (or conversely from
US marketers who want to target international
Web surfers).
…Because Most International Inventory Isn't
Being Monetized
Most US-based Web sites cannot effectively
monitor international traffic beyond simple
domain recognition (e.g. .uk, .fr, .de, etc.). But
DoubleClick has amassed an enormous IP
database that allows them to match IP addresses
to their origination. For example, one of the
largest ISPs in England is freeserve.com, which,
if you simply parsed your users by suffix you
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would assign to a US origination. DoubleClick
shared with us an example that one of the top 5
sites on the Web sent DCLK their log files to test
the size of their international traffic. This site
believed that 16% of their audience was coming
from 10 countries outside the US. DoubleClick,
using their IP database, showed the actual
number coming from those 10 countries was
32%. This is one of the reasons why Sportsline
has chosen DoubleClick to sell their
International ad inventory. Not only can
DoubleClick identify and target international
inventory better, they can bring their
international direct salesforce to bear for a US
Web site who cannot afford to field a salesforce
outside of the US. Again, we believe this is a
win-win-win: for multi-national advertisers who
want a one-stop advertising buy for the US and
international, for publishers who want to
monetize their (currently undervalued)
international inventory, and for DoubleClick
who participates in this revenue stream and adds
to the breadth and depth of their inventory.
If You Thought Microsoft Sidewalk Was A Good
Proxy For Local Advertising…
While Digital Cities, Sidewalk, Ticketmaster-Citysearch
and others tout the local advertising
opportunity aggregate eyeballs around local
content, today DoubleClick can aggregate local
eyeballs around any content. For example, the
DoubleClick Network has 1million visitors from
New York City per month. If you are a local car
dealer, say Potamkin, would you rather reach
NYC-based users when they are looking up local
restaurant and movie information or when they
are looking at car information on Autobytel or
Kelley's Blue Book? And for which would you
pay more? With DoubleClick Local, advertisers
can target on a geographic basis (paying a higher
CPM for a much more valuable buy) and
publishers benefit because their inventory can
get a higher CPM. On its own, a site would
never have enough “local” inventory to offer a
sizable population of users to anyone, but as the
owner of an expanding network, DoubleClick
has a large enough breadth (and fine enough
comb to filter with) to offer a sizable “local”
media buy on the Internet.
With The Alta-Vista Overhang Gone, The Street
Can Concentrate On What Matters
DoubleClick management insists that Compaq
isn't interested in owning a #10 portal and wants
to grow the property into a formidable
competitor to Yahoo!, MSN, and AOL. Prima
facie, this statement seems supported by
Compaq's recent actions on this front (the
purchase of Shopping.com and Zip2) and the
tacit implication that Compaq has some more
announcements/deals up their sleeve. Even if
Compaq doesn't materially change the Media
Metrix ranking for Alta-Vista, the DoubleClick
business probably won't suffer much. Net-net,
Alta-Vista is neutral at worst, and very positive
at best to DCLK.
The Model Stays The Same…For Now
We're not making any changes to our model for
1999 or beyond, though clearly we believe that
the visibility of the results (particularly revenue)
increases nicely. We're going to keep our
powder dry until DoubleClick reports their
March quarter sometime in the middle of April.
It's important to recall that management's
insistence on the idea that investment, not
profits, is key to deriving the greatest economic
value from their Internet advertising opportunity.
As such, they remain in investment mode;
expect S&M and R&D to have nice increases as
DCLK continues to expand internationally and
as the Closed Loop products/services roll-out.
Valuation Goes Up On Visibility And
Competitive Advantage
Though we're not changing our model
assumptions at this time, there can be no doubt
that the visibility of and confidence in the top
line here reduces the risk associated with the
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investment. As well, we'd argue vehemently that
DoubleClick's competitive position (certainly
with the Network business but increasingly with
the DART business) has grown stronger every
day and now that we believe has reached a real
inflection point (of no return?), we'd argue for a
lower discount rate and thus a higher valuation
(all other things being equal). Our target of $200
places a $3.4 billion valuation on DCLK, which
we get to via a revenue multiple (15Xs 2000
compared to the Internet universe mean of 18Xs)
and a discounted earnings approach (125Xs the
NPV of 2002's $2.50 EPS estimate compared to
the Internet universe mean of 165Xs forward
EPS). We admit that this is more art than
science, but on a relative basis, we find
DoubleClick cheap against its opportunity and
competitive position.
Yup…The Price Target Is Aggressive
For fun late last night we went back over a
model of DCLK that we kept from January 1998.
Our thinking at that time was that at the end of
1998 DCLK would report about $50 million in
revenue. Well, history now shows DCLK's 1998
revenue came in at $80 million, 60% higher than
what we (and the company, we may add) thought
was aggressive then. Now we're not saying that
our 2000 revenue estimate will prove to be
equally conservative, but our gut tells us that the
revenue and earnings upside remains too big to
quantify with any precision, and our recall from
the cold days of early 1998 adds weight to that
feeling. We'd also add that our bets in the
Internet space over the last few years have
tended to coalesce around those established
leaders whose markets were big, whose
management teams were aggressive and smart,
and whose business model made the most sense.
On all three counts, DoubleClick is exceeding
our early optimistic expectations.
What?! Upgrade Into A $40 Move In The Last 6
Trading Days?
We know we're taking a risk upgrading at this
particular moment, since any number of
hobgoblins could cause a nice retraction in this
stock sooner rather than later: quiet period
skittishness, unusual arbitrage-inspired trading
(from the recent $200 million convert offering),
profit taking (DCLK was at $87 March 1 st ), or
simply that the March quarter results won't meet
“whisper” number expectations (and who can
tell what those are?). But you pay us to take risks
and, besides, we hesitated to upgrade DCLK
when the Alta-Vista overhang was resolved in
January, and we've paid for it. As we said on
January 21st:
“Our maintenance of the Buy rating
reflects our strategy to keep our powder
dry on this one until we get just a bit
more data on those drivers of the model
in 1999: Compaq's investment in Alta-Vista,
the success of the Closed Loop
product, the continued ascendancy of
DART, and the critical mass point in
their International business. We suspect
all of these factors will tip their hand
one way or another in 1999 (our early
bet is that the tip will be positive) so
until then, we stick with the Buy rating.”
We don't want to learn this hesitation lesson
twice, so we won't get cute by trying to time a
trading call today (though we sure wish the stock
wasn't up $15 yesterday). We're upgrading
based on a more fundamental business
momentum call, so if (when?) the stock comes
back after such an aggressive move, we'd be all
over it attempting to round out a position in one
of the best plays on Internet advertising out
there.
Why We're Making DoubleClick A Core Internet
Holding
We chewed on this upgrade for some time, not
because we thought DCLK wouldn't do well as a
stock, but rather because of the austere company
DCLK now finds themselves in within our
universe of Internet coverage: we don't have too
many Strong Buy-rated names in our list and we
don't give out that rating easily. This is one of
the reasons we performed so much due
diligence, because we take our rating seriously
and use them to differentiate interesting
opportunities (Buy-ratings) from must-own-names
(Strong buy ratings). Sure, we've always
been interested in DoubleClick because of their
great technology, aggressive young management
team, and access to multiple revenue streams in
a hyper-growth market (Internet advertising).
But from where we sit, it is increasingly clear
that the number of revenue opportunities is
growing and so are their size. And as you've
heard us say before, once a company has reached
a point of critical mass within an increasing
returns market, they are very, very hard to
unseat. We believe that DoubleClick has
reached that threshold. With an Internet
advertising market of $7.1 billion in 2002 (a
238% increase from $2.1 billion in 1998) and a
set of products and services that (uniquely)
address a crucial market development (targeting)
at just the right time (1999), we've come to the
realization that DoubleClick should be a core
Internet small cap holding. Buy DCLK.
[Agencies, Advertisers, and Sites We
Interviewed: Agencies: Hill Holiday, Grey
Interactive, APL Digital, FCB, Margeotes
Fertitta & Partners, OgilvyOne, Anderson &
Lembke, Modem Media, DMB&B, iballs, i-traffic,
BBDO, Fitzgerald & Co., Bernstein-Rein,
Ketchum, Organic Online, Interactive 8,
Cybersight. Marketers and Merchants: Coca-Cola,
Levi's, Clorox, P&G, GM, UPS, 1-800-
Flowers, IBM, Office Depot, Sports Superstore
Online. Web publishers: The Weather Channel,
Bolt, CNET, PC Quote, Garden.com.] |
