Positive Comment on AOL from Famous BancBoston Analyst Keith
Benjamin in His Weekly Report. Enjoy!
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01:54am EDT 9-Apr-99 BancBoston Robertson Stephens (Benjamin, Keith 415-693-3
KBWK: The Web Report - Volume 2, Issue #14 (Page 1 of 2)
BANCBOSTON ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
Keith@rsco.com
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April 9, 1999
The Web Report -- Volume 2, Issue #14
This week, the NETDEX index closed at a new high of 1,102.84, up 13.6% from
last week and up approximately 654% over the same period last year. For
comparison, the NASDAQ ended the week up 4.5% from last week and up 42.4% from
the same date last year.
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 97 companies in the NETDEX index is
approximately $405.08 billion. This compares to the top 20 media companies,
which have a combined market capitalization of approximately $527.3 billion. In
the retail category, Wal-Mart's market capitalization is approximately $223.7
billion.
FRENZY STILL BASED ON STRONG FUNDAMENTALS, IN OUR VIEW -- While it remains easy
to dismiss Internet stocks based on challenges of rationalizing valuations, we
remain encouraged by underlying fundamentals as we start reporting season with
Yahoo!'s strong results. It is easy to be distracted by stocks running up
almost every day after IPOs, leaving many inherently good, but probably smaller
companies with big valuations. We believe there are still opportunities to
accumulate the stocks of a few inherently large companies caught by come
confusion, but set to report impressive first quarters, in our view. We remain
focused on Amazon, Lycos, Ticketmaster/Citysearch, SportsLine, Network
Solutions, and CNET.
WHAT GOES UP -- Our increased selectivity remains a function of our fear of
recurring patterns. Almost every quarter, absent significant news, the group
of Internet stocks declines after reporting season. This also tends to be a
sorting out period, with the leaders falling less and the laggards falling
more. As such, we remain picky.
YAHOO! REPORTS STRONG Q1 - Yahoo! reported 1Q:99 revenues of $86.7 million,
above our estimate of $77.0 million, and EPS of $0.11 (excluding one-time
charges) above our estimate of $0.08. These results appeared to be in line with
the high end of expectations, suggesting sustainable strong growth. We were
impressed by these results, particularly the strong page view and registered
user growth. Traffic increased to an average of more than 235 million page
views per day in March, compared to 167 million in December. Yahoo! now has
more than 47 million unique registered users, up from 35 million at the end of
Q4:98. We believe the GeoCities and Broadcast.com acquisitions will help turn
the company into more of a network than a portal. However, we believe Yahoo!
needs to do more to become more like an AOL. We do not expect Yahoo! to make a
third large acquisition in the next two quarters as it integrates the first two
acquisitions. We continue to see the value in Yahoo! stock, but are unsure what
the next big catalyst for the stock will be. Therefore, we would recommend
holding rather than accumulating positions at these levels.
LET'S NOT FORGET LYCOS - We believe Yahoo!'s strong March quarter bodes well
for Lycos and the entire group, pointing to the underlying growth and value in
the business. We find the risk/reward profile of Lycos stock compelling, based
on our view that of the possible scenarios, the most likely ones point to a
higher stock price. If the deal closes as planned, which we feel is most
likely, we want to own Lycos stock because we like the prospects for the new,
combined company. In fact, the combined USA Lycos Network appears to have more
of the elements of AOL than Yahoo!. If CMGI is able to find a higher bidder
for its Lycos stake, great. With valuations of potential acquiring companies
higher, such as AOL or Amazon, this may be possible. AOL may need to buy
someone to replace the Excite search/directory functionality once the deal with
Excite expires. Amazon could exploit the commerce-related content and swap out
the lesser Lycos brand. Another scenario could be that Lycos remains
independent, which we find both unlikely and negative as we believe the USA
Lycos Network has a much better chance of growing into its valuation than Lycos
alone. Of course, it is possible that USA improves the deal for Lycos, which
would create another positive scenario. The only challenge seems timing of
catalysts, with the quarterly report, proxy filing, and vote likely to help
over the next few months.
DITTO FOR TICKETMASTER ONLINE CITYSEARCH -- TMCS has been cast adrift with
Lycos, in our opinion. Again, we see prospects for a very strong quarter and
higher stock values if the deal closes or not. If the deal closes, we like the
added benefit that TMCS is trading at a 20% discount to its post deal value,
based on the exchange ratio of Lycos shares for TMCS shares under the terms of
the deal. We might argue that TMCS is a more attractive takeover candidate,
given the scarcity of local content and commerce Web companies. The company's
management has done a great job building the leading brand of local content,
with the on-line ticketing business quickly gaining popularity. The company is
scheduled to report Q1 results at the end of April.
AOL COULD BUY ANYTHING BUT HAS SHOWN STRATEGIC DISCRIMINATION, IN OUR VIEW --
AOL is the model for the proposed USA Lycos Network and Yahoo! Its $180
billion valuation clearly reflects an appreciation of that position. We are
evolving our thinking regarding AOL's options, given the power of its
valuation. We would be surprised if it bought a media company like CBS with a
less attractive set of growth opportunities when it would seem easy to set up
ownership of a joint venture in something like CBS.com, which would allow AOL
access to more content suitable for a broadband world without the baggage. We
keep wondering about the power of its brand and financial muscle. With all the
concern about competition from @Home and cable companies, we note the market
capitalization of @Home with Excite is now approximately $30 billion and the
market capitalization of the new AT&T/TCI is approximately $200 billion. We
suspect we are not thinking broadly enough about AOL's growth paths and
potential acquisition targets. It is barely starting to build business
services, even after the closing of the Netscape deal. While the math
challenge is large, we still expect the company will continue to grow into a
surprisingly large valuation. We expect another record quarter in March, with
upside to all forward estimates.
POTENTIAL RENT INCREASES AT CNET'S STORES -- We believe there could be
significant upside to CNET's March quarter, when the company reports on April
21st. We expect to hear that CNET has been able to charge higher prices for
the 83 merchants added in the second round of slotting on its Shopper.com and
Computers.com sites. Previously, we estimated the average lead fee was in the
range of $0.50 to $1.00. We believe CNET is one of the Internet monsters, with
a leading competitive position and high current levels of profitability. We
see considerable earnings upside from CNET's ability to aggregate
computer/technology buyers and link them to sellers, and believe we will able
to raise estimates going forward as the lead generation business accelerates.
NETWORK SOLUTIONS -- We continue to see confusion and misinformation regarding
Network Solutions' regulatory and competitive position. We have been waiting
for ICANN to publish the list of the five initial "test-bed" competing
registrars to learn the price the Commerce Department will approve for the
registry function to be provided by Network Solutions. We expect there may be
a delay past the previous April 12 deadline, perhaps as much as a week or two.
The stock has been volatile as investors sort through the impact of competing
registrars and speculation on the range of possible registry prices. We
continue to believe there is a good chance that no strong competitor will apply
for registrar status, with Network Solutions having a huge marketing lead
regardless. We continue to believe the registry price should be somewhere
around $10 per domain name per year, although some have speculated it might be
much lower. We would not be surprised by a range of prices scaling down over
time as registrations reach much higher levels. We suspect the stock may have
one or two more bullets to take until these uncertainties are resolved, but we
were encouraged by the stock's relatively benign reaction to recent misleading
news items. We like the stock's current risk/reward profile and would begin to
build positions now, prior to resolution of these issues. We expect the
company to report a very strong March quarter report on April 22.
EXCITE REPORTING NEXT WEEK - Excite is scheduled to report on April 15. We
expect Excite to meet our Q1 estimates of $51 million in revenues and $0.03
EPS, however do not expect much upside, based on March being a seasonally slow
quarter and the company's preparation to be integrated with @Home. We expect
to hear a further update on the acquisition when @Home reports next Tuesday,
April 13. We believe @Home can take advantage of Excite's content and services
to enhance its technology leadership position for consumer broadband services.
We expect the broadband market to potentially surprise us in the second half of
1999 as cable modems become easier to install. While these stocks have
appeared to benefit from the appreciation of the potential of broadband
services, we expect the pace of positive surprises may accelerate.
GEMSTAR WAITING FOR POSSIBLE SETTLEMENT -- We have been surprised, but pleased
by the stock's hopeful stance towards settlement discussions that may be
occurring between Gemstar and United Video. While there may be some near-term
risk to the stock, if there is not a settlement, we continue to find the
stock's long-term risk/reward profile compelling. While not a pure Internet
stock, the company is starting to incorporate advertising into its interactive
television guide. We expect television will continue to capture the majority
of consumer time. If Gemstar is recognized as the standard, with the cable
and cable box companies forced to incorporate its guide faster, it could
quickly build a new advertising platform, allowing considerable upside to
estimates. We remain hopeful, given the company's track record of winning
disputes regarding contracts and the position of its patents.
E-Tailing Update -- Lauren Cooks Levitan 415-693-3309, lauren@rsco.com
MUSIC LABELS BECOMING E-TAILERS - Record companies are cooperating in an effort
to crowd out smaller music e-tailers. This week, Bertelsmann AG, owner of BMG
Entertainment, and Seagram Co., owner of Universal Music, announced plans to
merge their Internet music operations. We believe the combination of the two
music giants, which control approximately 45% of the U.S. music market, could
signal a shift toward more direct sales from manufacturers to consumers. Even
without the added traffic from Universal Music, BMG's Web site was already the
12th most popular Internet shopping site in February, according to Media
Metrix. We like the BMG's membership model because it represents an effective
means of customer acquisition while also establishing a pipeline of higher
margin repeat business. In our view, this alliance poses a meaningful threat to
pure-play music e-tailers like CDnow. However, if the labels get past piracy
fears on digitally downloaded music, it would benefit the music portals,
including CDnow.
AMAZON STILL WINNING THE MUSIC WAR - We continue to favor Amazon in this
category given the company's brand awareness, huge customer base, and ability
to leverage expenses over multiple product categories and businesses. Despite a
4.7% move this week, we believe Amazon's stock price still does not fully
reflect our expectation for a stellar quarter, which will be reported on April
28th.
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