Keith Benjamin report
the WEEKLY WEB REPORT #67, April 9, 1999
The Web Report - Volume 2, #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@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.
ARE PORTAL PAYMENTS SUSTAINABLE? - According to a report released recently by Jupiter Communications, a majority of polled e-commerce executives were garnering less business from their advertising and marketing deals with major Web portal sites. While we suspect many of these responses are self-serving, we would not be surprised to learn of more contract renegotiations, particularly among struggling e-tailers. We believe the weakest e-tailers in terms of brand, service, and competitive position may not be able to afford to continue to pay rent to online landlords. For example, Preview Travel claims to have renegotiated its deal with Excite and CDnow has indicated similar changes in deal terms. This may also reflect the continued disparity between the value of first place among networks. For example, AOL continues to post bigger and bigger payments for exclusive access to its customers in the major consumer categories. Yahoo! also seems to be securing more money. Similarly, CNET appears to be raising rents in the competitive computer market. Our thesis remains that portal payments will decline as a percentage of larger sales from a few stores. We believe this bodes well for the profitability prospects for the strongest e-tailers (like Amazon), who are driving a majority of their traffic directly to their site through bookmarks, affiliate programs, and effective off-line marketing.
BUYING FURNITURE ONLINE - In our opinion, there are significant opportunities for established brick-and-mortar retailers to build successful businesses online. One land-based branded retailer that we feel has a legitimate opportunity to do so is Ethan Allen Interiors, the branded furniture manufacturer and retailer. While furniture may not seem like the most obvious online purchase, we believe the category is ripe for opportunity. We know of several pure plays addressing the space, with Furniture.com the best among them at this point. Ethan Allen's site does not yet allow customers to complete orders online and still has many kinks to be worked out. However, we believe the company's well known brand and local network, which provides proven delivery capabilities as well as customer access to free designer assistance provides a nice base from which to build an e-tailing business.
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(1) Change based on last 12-month's performance.
Source: AT Financial Information and BRS Estimates
Rating Definitions: The following are basic definitions for our recommendation ratings.
Strong Buy - 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 - Rating for a stock, which we recommend buying, however believe there may not be near-term news or events to move the stock price.
LTA - Rating for a stock, which we believe could have long-term value, however we would not necessarily recommend buying.
MP - 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, Cisco Systems, CMG, CNET, Preview Travel, Digital River, DoubleClick, eBay, Egghead.com, 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, Egghead.com, E*Trade, Excite, NetGravity, ONSALE, Preview Travel, TicketMaster Online-CitySearch and SportsLine within the past three years.
FOR ADDITIONAL INFORMATION, PLEASE CALL YOUR BANCBOSTON ROBERTSON STEPHENS REPRESENTATIVE AT (415) 781-9700.
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.
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Unless otherwise noted, prices are as of the close April 8, 1999.
Copyright © 1999 BancBoston Robertson Stephens Inc.
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