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Technology Stocks : USWeb (USWB) -- Ignore unavailable to you. Want to Upgrade?

To: greenspirit who wrote (861)	5/12/1999 2:14:00 AM
From: Ibexx	Read Replies (1) \| Respond to of 1188

Michael and thread, Details of a Prudential report: ___ USWEB/CKS: INITIATING COVERAGE WITH A STRONG BUY RATING Subject: USWeb/CKS (USWB-23)--OTC Advertising COM OPINION Current: STRONG BUY Analysts: James D. Dougherty (212) 778-2055 Prior: NONE Ellen M. Dumbleton (212) 778-4839 RISK: High 12-Month Target Price: $35 INVESTMENT CASE/VALUATION: We are initiating coverage of USWeb/CKS with a Strong Buy rating. Our target price is $35 per share. Our rating is based on the company's position in the rapidly-growing market for integrated Internet-related information technology and marketing communications services and investors' current disaffection with such stocks. USWB is priced recently 52% below its 52-week high of $47, and is down 48% in 2Q 1999. Our target price is based on USWeb/CKS selling at the average multiple of revenue held by 5 comparable companies, based on revenue estimates for 1999. We believe that valuing Internet-related stocks beyond this level of precision tends to be specious, but we will do the best we can. The five comparable companies are Razorfish, Proxicom, ModemMedia/Poppe-Tyson, Sapient, and Cambridge Technology Partners. We have chosen this list based on classifications included in International Data Corporation's (IDC) report on Internet consulting companies and discussions with the management of USWeb/CKS. As indicated in Figure 1, these companies are selling at an average multiples of 7.2 times estimated revenue in 1999. At this multiple, USWeb/CKS would be valued at $3 billion, or $35 per share. On average, the stocks of the comparable companies are down 10.1 % to date in 1999 and 5.7% in 2Q versus increases of 9.4% and 4.6% , respectively, for the S&P 500 in the same periods. Valuing USWeb/CKS at 7.4 times estimated revenue of $600 million in 2000 would produce a target price of $43 per share. ......... Our target price implies multiples of 52 times and 27 times estimated cash EPS in 2000 and 2001, respectively, of $0.67 and $0.84. These multiples are at discounts of 22% and 60%, respectively, to estimated per year growth in cash EPS of 67% over the 1997-2001 period. We are not willing to forecast when investors will begin to focus on multiples of estimated EPS for Internet-related stocks. We believe, however, that, when they do, USWeb/CKS's valuation will appear to be more than reasonable relative to comparable companies. BASIS FOR RECOMMENDATION Market Opportunity. Estimates presented herein estimate the total size of the Internet IT services industry and Internet marketing communications market in the U.S. in 2000 at $15.6 billion. By 2005, total worldwide spending for these services could exceed $50 billion. We believe that USWeb/CKS is one of the few companies currently visible with the scale, geographic reach, and depth and breadth of integrated services to fully exploit this opportunity now. Vision And Positioning. We believe that both wings of the company recognized early on the pervasive influence that the Internet would have on their respective businesses. USWeb went through a rapid growth phase via acquisitions and recognized that being able to provide integrated marketing solutions on a profitable basis was an important element in sustaining rapid growth into the new century. For its part, CKS Group recognized that building the technical capability that it needed to support E-commerce for its clients would be an expensive and lengthy experience, if it could be done at all. Together, we think they have the foundation to exploit the opportunities that both Internet IT services and marketing communications offer. Scale, Geographic Organization, And First Mover Advantage. We believe that USWeb/CKS has tracked closely the development of the Internet through the experimental, tactical, and strategic phases. It is now ready to step off with the Internet to the transformational stage of development. This should be largest and most profound phase. The introduction of Electronic Services should extend the timeline, and revenue streams, of the Professional Services segment of USWeb/CKS into the indefinite future. There are larger IT consultants moving into this space and numerous smaller Internet-related marketing communications firms have been spawned. In our view, few, if any, have the combination of scale and skills needed to succeed in the market of the future as USWeb/CKS. Financial Sense And Responsibility. We believe that USWeb/CKS has built a business, not a valuation model. The company is investing heavily in the rapid growth opportunity it foresees over the next 3-5 years. Most of the investments will come in building substantially larger headcount. Still, the company turned profitable on a proforma cash basis in the second quarter of 1998. We expect annual profitability on reported basis in 2001. USWeb/CKS should be cash flow positive from operations beginning in 1999. Internal cash flow should fund operations at least through 2001. The company has no current plans for external debt or equity financing. RISKS The Combined Company May Not Gel. We are convinced that the merger makes both strategic and financial sense. Much has been accomplished in the months since the transaction was closed in December 1998. Still, we are in what CEO Robert Shaw calls the "ugly period." Merging two cultures in a short period of time in an extremely competitive industry that is moving at Internet speed may ultimately be too ambitious a goal. We believe that some part of the volatility in the stock price since the merger has been due to changing investor sentiment on this subject. Internet Valuations May Not Be Sustainable. Our recommendation is based on investors accepting valuation parameters significantly above those have been considered rational in the past. So far, they seem to be doing so. To the extent that this sentiment changes, USWeb/CKS could turn out to be a poor investment for reasons unconnected with achieving the objectives and estimates set out in this report. In particular, the company will be issuing large numbers of new shares over the next several years as options issued in connection with acquisitions continue to vest. This could be controversial if market attention shifts to the dilution they cause, or if net income growth falls below our estimates. Ibexx (in @24)