This Just In! BancBoston's Keith Banjamin Predicts New Highs for Net
Leaders Like AOL, AMZN, LCOS, NSOL, CNET and EGRP. Keep Up Your Faith!
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06:12am EDT 16-Apr-99 BancBoston Robertson Stephens (Benjamin, Keith 415-693-3
KBWK: The Web Report - Volume 2, Issue #15 (Page 1 of 2)
BANCBOSTON ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
Keith@rsco.com
Unsubscribe to: rsch_webmaster@rsco.com
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.
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.
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.
E-Tailing Update -- Lauren Cooks Levitan 415-693-3309, 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.
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