BANCBOSTON ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
mailto:Keith@rsco.com
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April 16, 1999
The Web Report - Volume 2, Issue #15
INTERNET STOCKS TAKE A BREAK - The Internet stocks finally took a break,
although it was small compared with the last two months of almost
uninterrupted ascent. This week, the NETDEX index closed down 5% from
last week at 1046.95. This was up approximately 551% over the same
period last year. For comparison, the NASDAQ ended the week down 2% from
last week, but still up 38% 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 $401.1 billion. This
compares to the top 20 media companies, which have a combined market
capitalization of approximately $527.5 billion. In the retail category,
Wal-Mart's market capitalization is approximately $211.6 billion.
A GAME OF CHICKEN: We were encouraged to see the first break from
frenzy this week. While we suspect many were looking for a
post-reporting season lull, the stocks kept going up. It has been
particularly disconcerting to see companies in narrow and competitively
challenged markets show stock spikes to valuations difficult to quickly
grow into. The challenge for the lesser-company stocks has been
figuring out when to sell, because the valuation ranges started high and
went to galactic levels. This week, many investors blinked. We would
not encourage waiting any longer. We expect further divergence between
the winners and laggards, with the few standouts declining a bit before
recovering to new highs and most stocks falling and not getting back
up. We expect reporting season to remind investors how difficult it is
to compete on the Web, with few companies having big, scalable brands.
We only want to own the big franchises showing fundamentally sound
business models with marketing more a function of word-of-mouth than
aggressive spending. These names at the top of our list still include
AOL, Amazon, Lycos and TicketMaster CitySearch, Network Solutions, and
CNET. We expect each to report strong quarters to help investors
appreciate how quickly each company can grow into its valuation.
IPO SPREAD NARROWING - We believe we are beginning to see a slightly
more rational IPO process in terms of the entourage of Internet
companies being introduced to the market each week. Comparing Q4
Internet-related deals to Q1, we found it interesting to note that the
average first day jump from the IPO offer price to the first trade,
declined from approximately 225% in the December quarter, to
approximately 156% in Q1. We expect this spread to continue narrowing
as more supply hits the market and as stocks stop going up after the
first day of trading. For reference, the average percentage change from
the closing price on the first day to the price two weeks later was up
31.4% in Q4 and up only 14.3% in Q2. We believe investors will learn to
avoid this frenzied trading as quickly as the first few deals start
going down after the first trading day. We have already seen a few
examples.
AOL - AOL surpassed 17 million worldwide members this week. This appears
to be on track with our estimate of 17 million members for the end of
March. Members appear to be spending 55 minutes per day on AOL's
service, up almost 10 minutes over a year ago. AOL now supports more
than 1.1 million simultaneous users during peak hours of the day, almost
twice the number CNBC and CNN support at any one time. Other key metrics
released this week include: approximately 56 million emails, 532 million
instant messages, 121 million stock quotes, and 2.6 billion Web URLs,
are served through AOL each day. We expect to hear more details when AOL
reports on April 27th.
NETWORK SOLUTIONS - We believe NSOL is continuing to widen its marketing
lead, despite mis-perceptions of competitive challenges. Network
Solutions signed 18 U.S. companies to its Premier Domain Registration
Service Program in Q1:99, bringing the total to 174 ISPs and Web hosting
and design firms worldwide. We like the stock's current risk/reward
profile and would begin to build positions now, prior to resolution of
the issues surrounding who the next registrars will be. We expect the
company to report a very strong March quarter report on April 22.
ONLINE TICKET SALES ACCELERATE- TMCS announced that online ticket sales
ramped much faster than expected in the March quarter. Consumers in the
U.S., U.K. and Canada bought more than 1.6 million tickets, or $60
million worth, through TicketMaster.com. This is up more than 275% over
the same period last year. Of the total tickets sold by TicketMaster
Corporation in the March quarter, approximately 10% were sold through
TicketMaster Online CitySearch, above our estimate of 6.4%. The
increase in online ticket sales were across all event demographics, with
no one event accounting for the impact. For example, 25% of all Chicago
Cubs' 1999 first day single game ticket sales, and over 12% of the Dave
Matthews Band tour tickets were sold online. The rock music group the
Cranberries have recently announced that all concert tickets for their
upcoming tour are being sold exclusively online through TicketMaster
CitySearch. 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.
@HOME & EXCITE REPORT Q1- Excite reported $54.1 million in revenues,
above our estimate of $51.0 million, and EPS of $0.04, excluding
one-time items, versus our estimate of $0.03. We did not expect much
upside, based on March being a seasonally slow quarter and the company's
preparation to be integrated with @Home. However, despite these issues,
we were impressed with the fact that Excite increased its registered
user base by 40% to 28 million in the quarter. In addition, traffic
increased 33% to 77 million page views per day in March.
To review @Home's Q1 results, which were announced earlier this week,
the company reported $25.1 million and a net loss of $0.07, before one
time adjustments. As of March 31st, @Home served over 460,000 cable
modem subscribers in North America, up 39% from 331,000 as of December
31st.
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.
INFOSEEK - Infoseek reported Q2:99 revenues up 105% to $29.6 million,
slightly below our estimate of $31.7 million. Q2 earnings were a net
loss of $0.39, excluding $4.3 million in in-process research and
development charges and $28.4 million in amortization of goodwill,
better than our estimate of a loss of $0.50 per share. Excluding just
the in-process R&D charges, EPS were a loss of $0.86 per share, better
than our estimate of a loss of $0.96 per share. Including the one-time
charges, Infoseek's net loss was $0.93 per share. Traffic to the GO
Network increased to 45 million page views per day in March, up from 33
million in December. Registered users grew from 8 million at the end of
Q1 to 12 million by the end of Q2. While we were encouraged by the
increase in traffic in the quarter, we remain concerned that the Disney
relationship will slow down Infoseek's ability to move at the pace of
the Web. The Disney takeover appears to protect the downside to the
stock, however may also limit upside to Infoseek shareholders. At this
time, we prefer to wait to see whether Infoseek's aggressive marketing
spending will be enough to close the widening gap among itself and its
competitors, who are picking up the pace through big deals.
E*TRADE - Earlier this week, E*Trade launched a new brand advertising
campaign, focusing more on the mainstream investor than ever before.
Included in the campaign are new television advertising spots during
financial programs as well as prime time programming. In addition,
E*Trade will continue to advertise in print and on outdoor billboards.
We believe this campaign will help to further accelerate the company's
already increasing momentum.
On the competitive, front, Ameritrade reported its March quarter results
this week, reporting $63.7 million in revenues and EPS of $0.14, above
consensus expectation of $0.07 EPS. Ameritrade added 74,000 net new
accounts in the quarter, bringing the total to 428,000. This compares to
our March quarter estimate for E*Trade of over 100,000 net new members,
including 82,000+ new active accounts and 19,000+ new OptionsLink
accounts, bringing its total to 777,550. Ameritrade's average daily
trades increased to 52,218 in the March quarter, up from 33,473 in the
previous quarter. This compares to our estimate for E*Trade of only
38,675 average daily trades, however we suspect this may be low by a
factor of at least 1.5x, since E*Trade has historically had much higher
trading volume than Ameritrade. Finally, Ameritrade spent approximately
$160 in the quarter per acquired account. This is much lower than
E*Trade's estimate of $550 per account.
We believe there is upside to March quarter estimates, based on
Ameritrade's strong results. We believe both companies benefit from the
same online environment, and that E*Trade's results will be that much
higher than we had previously anticipated.
CMGI - CMGI hosted an analyst meeting this week, highlighting its
growing portfolio of private and public internet investments. We see
the company evolving into more a Web conglomerate, benefiting from
cross-relationships between companies, potentially being more aggressive
with acquisitions. We expect we will be surprised by companies ability
to grow into its valuation by leveraging its management and financial
resources.
E-Tailing Update - Lauren Cooks Levitan 415-693-3309,
mailto:lauren@rsco.com
AMAZON - DEVELOPING THE BACK END - Amazon continued to follow
best-of-breed retail practices this week by further developing its
distribution capabilities. We have often focused on the importance of
e-tailers controlling the entire customer experience, including customer
service and fulfillment. As expected, Amazon announced this week they
will be opening a Midwest distribution center (its largest to date)
located in Coffeyville, Kansas. We expect the company to expand the
facility from its current 460,000 square feet to nearly 750,000 square
feet and open it for operations in 2H:99. We believe this new facility
should allow the company to better serve its customers in the Midwest
and Southeast, while also leading to reduced fulfillment costs over the
long-term. Given Amazon's substantial cash position, we believe they
have the flexibility to make these substantial infrastructure
investments, to strengthen their competitive positioning relative to
more cash-constrained competitors.
AMAZON - CONNECTING ONLINE AND OFFLINE AUCTIONS - Amazon also announced
plans to acquire Livebid.com, whose real-time software technology allows
online bidders to participate in "real world" live auctions. We view
this news as further evidence that Amazon is quite serious about the
auction market and has innovative plans beyond its current offerings. We
believe Livebid.com's technology could provide Amazon's customers access
to specialty products and rare collectibles that would otherwise not be
offered online. More importantly, the technology could potentially link
several auction houses with Amazon's 8 million customer base, pointing
to Amazon's very real evolution into the first true e-tail portal.
WILL FREE SHIPPING WIN OVER CUSTOMERS? - Cyberian Outpost and Onsale
both announced this week that they would offer customers free shipping.
While Onsale's offer lasts only until the end of the month (Outpost's
appears indefinite), it also includes a waved transaction fee ($5-$10)
for its atCost customers. Free shipping is a tried and true promotional
method used by catalog companies to stimulate trial and sales. In our
view, such a tactic can get customers to try a Web site, however, we
believe fair pricing must be accompanied by superior customer service
and an overall positive shopping experience. We continue to believe
promotional activity will remain intense online and look for a more
rational pricing environment to be linked directly to the capital
market's willingness to fund e-tailing businesses.
E-TAILERS ARE RETAILERS- THE LESSON OF DELIA'S/iTURF - This week,
Delia's, the parent of the recently spun-out teen Web site iTurf,
provided Wall Street with downward outlook for its current quarter and
fiscal year. The company cited disappointing spring merchandise trends
at its Screem retail division. Both stocks were hit hard on the news,
with DLIA shares declining 27% and TURF down almost 20% on the day. We
see a couple of lessons to be learned from this. First, the analysis of
e-tail companies must go well beyond the Internet opportunity and must
incorporate an understanding of the merchandise trends of the business.
Second, Internet pixie dust works in both directions - just as
retailers' shares have leapt on news of their Internet-related
businesses, we now have our first example of an e-tailer being tainted
by the woes of its parent. Shares of Delia's rose as much as 70% after
iTurf filed for its IPO, as investors looked at an investment in DLIA's
as a way to buy TURF (Delia's has 95% voting power in iTurf). In
fairness, it's not obvious to us that the problems facing the retail
business will have impact on iTurf's ability to meet growth
expectations. However, it is clearer to us that the Internet businesses
of land-based companies will be inexorably linked to the fortunes of
their parents.
EBAY- eBay recently completed the largest secondary offering in Internet
history, raising $700 million in cash proceeds for its war chest. We
continue to have high expectations for eBay as the leading
person-to-person auction Web site. We are excited by the company's
recent deal with AOL and the implictions for eBay in regional and
international markets. Through integration with AOL's Digital City, eBay
should be able to quickly build a significant presence in local markets,
starting with Los Angeles later this quarter. We also believe there is a
hidden treasure to this deal in the planned integration of ICQ and
eBay's site. We feel ICQ could offer eBay the potential for real-time
chats about ongoing auctions and exposure to a new demographic that
differs from AOL's typical customer base. eBay also announced this week
a five-year agreement with iShip.com and Mail Boxes Etc. Through its
partnership with iShip.com, eBay customers will be able to get real-time
shipping cost quotes via the Internet. We believe Mail Boxes Etc. could
eventually offer eBay customers the option of inspecting shipped goods
at their retail stores prior to taking possession, which is yet another
innovative step by eBay to reduce its already minimal cases of fraud.
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Rating 4/15 4/08 1-Wk 52-Wk Chg
Chg High 52Wk Hi
4/08 - to 4/15
4/15 Price
Amazon AMZN SBUY 167 1/4 179 -7% 199 1/8 -16.0%
Am Online AOL SBUY 143 7/8 160 1/2 -10% 175 1/2 -18.0%
CDnow CDNW MP 16 14 3/4 8% 39 1/4 -59.4%
CMGI CMGI LTA 276 1/4 246 1/2 12% 330 -16.3%
CNET CNET BUY 127 1/8 115 1/3 10% 159 1/2 -20.3%
Dig River DRIV BUY 40 43 3/8 -8% 61 3/8 -34.8%
DbleClick DCLK BUY 127 7/8 133 1/5 -4% 164 1/2 -22.3%
Ebay EBAY BUY 178 7/8 171 3/4 4% 195 -8.3%
Egghead EGGS BUY 15 5/8 16 5/8 -6% 40 1/4 -61.2%
E*Trade EGRP BUY 101 4/9 92 7/8 9% 144 1/2 -29.8%
Excite XCIT NR 147 147 1/2 0% 187 7/8 -21.8%
Gemstar GMST BUY 101 1/2 105 1/2 -4% 115 -11.7%
Getty GETY BUY 25 23 3/8 7% 27 5/8 -9.3%
InfoSpace.com
INSP BUY 120 7/8 109 3/4 10% 141 -14.3%
Lycos LCOS BUY 94 4/7 102 5/8 -8% 145 3/8 -35.0%
Modem Media Poppe Tyson
MMPT BUY 38 1/2 47 4/5 -19% 55 1/8 -30.2%
NetGravity NETG BUY 46 3/4 44 6% 66 7/8 -30.1%
NetwrkSols NSOL BUY 93 1/2 111 7/8 -16% 153 3/4 -39.2%
NewsEdge NEWZ MP 9 3/8 7 5/8 23% 19 3/4 -52.5%
Onsale ONSL BUY 35 36 1/2 -4% 108 -67.5%
Prv Travel PTVL BUY 20 3/8 20 1/2 -1% 44 -53.7%
Infoseek SEEK MP 64 5/8 79 1/2 -19% 100 -35.4%
SprtsLnUSA SPLN BUY 52 3/4 53 3/8 -1% 59 1/4 -11.0%
TicketMaster Online CitySearch
TMCS BUY 38 3/8 36 1/2 5% 80 1/2 -52.3%
Xoom.com XMCM BUY 82 70 17% 98 1/2 -16.8%
Yahoo! YHOO BUY 194 5/8 206 2/3 -6% 244 -20.2%
NETDEX Index
NETDEX 1,044.43 1,102.84 -5.3% 1,102.84 -5.3%
KEBDEX Index
KEBDEX 1,336.52 1,415.69 -5.6% 1,415.69 -5.6%
NASDAQ Composite Index
COMQ 2,522.04 2,573.39 -2.0% N/A 43.7%(1)
(1) Change based on last 12-month's
performance.
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Source: AT Financial Information and BRS Estimates
BancBoston Robertson Stephens maintains a market in the shares of
Amazon.com, CMG, CNET, Preview Travel, Digital River, DoubleClick, eBay,
Egghead.com, E*Trade, Excite, Gemstar, Getty, Infoseek, Lycos, Modem
Media, NetGravity, Network Solutions, NewsEdge, N2K, ONSALE, Preview
Travel, SportsLine, TicketMaster Online-CitySearch, Xoom.com and Yahoo!
and has been a managing or comanaging underwriter or has privately
placed securities of Digital River, eBay, Egghead.com, E*Trade, Excite,
Modem Media, NetGravity, ONSALE, Preview Travel, TicketMaster
Online-CitySearch, Xoom.com 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 - Rating for a stock, which we believe could have
significant, positive price movement near-term and/or represents
outstanding competitive and business model potential. 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.
Long-Term Attractive - Rating for a stock, which we believe could have
long-term value, however we would not necessarily recommend buying.
Market Performer - 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 Thursday, April 15,
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
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
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information and opinions contained in this Report. BancBoston Robertson
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Copyright * 1999 BancBoston Robertson Stephens Inc. |
