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@Home For The Holidays
The High Tech Arena 4/19/99
By Joe Arena
Editor
One of our primary investment strategies during the past year has been to eradicate or underweight in our model portfolio those companies with excessive exposure to the PC business. (with the exception of Microsoft) We believe that the big money over the next 5-10 years is going to be mad investing in the following themes: the convergence of voice, video, and data, bandwidth, e-commerce, networking, wireless communications, and broadband Internet access. That being said, we believe that @Home offers the best risk/reward ratio in terms of capitalizing on broadband Internet access
via cable modems.
@Home distributes high speed, openly accessible Internet and Web services to homes and corporations using it's own network architecture and a variety of transport options. The cable connection allows users to realize tremendous increases in speed versus conventional Internet services. @Home provides unique multimedia applications that greatly exceed what is now possible to experience on the web. @Home also leverages the fact that Internet access via cable modems is always available, and does not require a
lengthy boot up process, which is now the norm.
@Home (athm) is gaining substantial momentum in its quest to dominate the broadband Internet access space. The company has now signed deals with 21 different cable companies, which allows penetration into 65 million homes globally. Currently, athm has the cable infrastructure in place to reach 15 million potential customers. Athm also is achieving a significant acceleration in subscriber growth, adding 129,000 subscribers in the recently
ended quarter, a 39% sequential increase. We also expect that every athm cable affiliate will be reporting very strong modem subscriber growth.
Five of these affiliates (TCI, Cox, Comcast, Rogers, and Shaw) are now averaging more than 2000 installations per week. Our projections indicate that by the end of this year, athm should have about 1.1 million subscribers, with monthly fees remaining flat at $40 and churn rate due to customer dissatisfaction continuing to be infinitesimal. Helping to fuel this growth will be standardized modems which will facilitate penetration into retail channels. It is also important to note that by Christmas, Dell and other major box makers will be building cable modems directly into their computers.
Athm will also begin to appear in the set top box space sometime in the second half of 1999.
It is also interesting to consider the metrics pertinent to athm's
broadband portal. Total page views increased by 70% for the quarter to 116 million. The average pageviews per subscriber per day also increased to 125 in the quarter, up 25% sequentially. Of particular importance is that the average user spends 2 hours per day on the service, a figure which is about twice the time spent online by the typical America Online user. The point to be made here by these numbers is that athm has demonstrated an ability to develop compelling broadband content, which bodes well for the future growth
of broadband Internet access.
Athm is also experiencing impressive growth in two other areas of its business, @Work and @Media. @Work represents the monthly service fees generated from business customers for high speed Internet access; this business was up 31% sequentially in the first quarter. @Media represents advertising revenue generated by athm, and was up 10% sequentially in the first quarter. Athm also added 33 new advertisers in the quarter, including such household names as Ford, Visa, Ralston-Purina, and Macy's. These mainstream consumer names continue to add credence to the viability of this new advertising medium.
From the standpoint of government regulatory issues, the recent efforts on the part of America Online and Mindspring to revisit the issue of "open cable access" have been negated by Senator McCain's Congressional sub-panel. This decision is obviously a positive development for athm. However, the broadband Internet access space is far from being a zero sum game. America Online not only has the strongest franchise and brand equity on the Internet, but has proven to be exceptionally adept at marketing and execution. Thus, it can be surmised that this ruling will not preclude America Online from
becoming a major player in broadband Internet access. Moreover, we believe it is incontrovertible that America Online represents the greatest threat to Athm, and this threat is a formidable one indeed. On the other hand, Microsoft remains firmly entrenched in the athm camp, (as evidenced not only by their $1 billion investment in Comcast, but their other recent investments in cable companies) which could possibly put America Online at a disadvantage over the long run.
There are other salient risks that threaten the growth of athm. First, it is imperative that management executes flawlessly in terms of the Excite acquisition. If there is any slippage in this area, it will offset the competitive advantage which this deal should provide. Moreover, the broadband access space is becoming increasingly competitive as the phone companies and RBOC's (Regional Bell Operating Companies) are beginning to roll out services which are similar in terms of bandwidth. Furthermore, other low cost services broadband solutions could manifest themselves before
athm has achieved critical mass and economies of scale. This would prevent athm from appealing to a large segment of the mass market which may be willing to settle for less bandwidth at a lower price.
In conclusion, although we believe that athm is well positioned to exploit the nascent market for broadband Internet access, it is not advisable for most investors to overweight the company in a portfolio. We also believe that any attempt to justify a valuation for athm or project a target price for the stock is an effort in futility. Notwithstanding, athm is a long term core holding for any investor with sufficient net worth and risk tolerance wanting to play the growth of the Internet. Suffice it to say that if we are correct about the growth potential for athm, it could prove to be as
profitable as buying Microsoft in 1986.
TRADING UPDATE: The sector rotation out of high tech that occurred during the past week provided more opportunities for shorting CSCO puts. Also, the pullback in Cisco Systems stock also underscores the effectiveness of our trading strategy, as we simply rolled over the Cisco 110 and 115 puts we were short.
The good news was that the Cisco April 105 puts we shorted at 5 5/8 expired worthless, netting a profit of $5625 for every 10 contracts that we shorted. Also, we had shorted the April Cisco 110 puts for 7 1/4, and covered this position on Thursday at 2 1/2, generating a profit of $4750 for every 10 contracts we shorted. We also shorted the Cisco May 110 puts for 7 1/4 on Thursday, taking in $7250
for every 10 contracts we shorted.
We were forced to roll over the Cisco April 115 puts we had shorted at 6 3/8. We covered this position on Thursday at 6 7/8. However, we simultaneously shorted the Cisco May 115 puts for 10 1/4, taking in $10,250 for every 10 contracts shorted. Therefore, rolling over the April 115 puts to the may 115 puts generated a net credit of $3375 for every 10 contracts shorted, and of course we keep the original 6 3/8 that we took in on the April puts, or $6375 for every 10 contracts shorted.
In addition, we took advantage of the unjustifiable shellacking that EMC took last week, shorting the May 115 puts for 9 3/8, and the May 130 puts for 20 1/4. (taking in $9375 and $20,250 for every 10 contracts shorted.
Finally, as a long term hold, we took an initial position in Qwest, at an average cost of 94.5. Since we bought only 1/3 of a position, we are prepared to dollar cost average if we see the stock stabilize in the low 80s.
Note: The High Tech Arena will now be published on a monthly basis.
DISCLAIMER: The information herein has been obtained from sources which are believed to be reliable, but there are no guarantees as to its accuracy or completeness. Neither the information nor any opinion
expressed constitutes a solicitation for the purchase or sale of any
security.
THE HIGH TECH ARENA
Joe Arena
Editor
JRArena@aol.com
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