from aol board
To: Mitchell Vince (18881 )
From: Glenn D. Rudolph
Thursday, May 27 1999 9:11AM ET
Reply # of 18882
BANCBOSTON ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
mailto:Keith@rsco.com
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May 27, 1999
The Web Report ˆ Volume 2, Issue #21
CAPITULATION - We have decided to issue the weekly e-mail a day early
this week, based on our feeling that we are at an important inflection
point in the Internet stock group. Most stocks have already fallen as
much as we‚ve seen in previous quarterly patterns. In our view, many
investors appear to have given up after recent declines, demonstrating
capitulation that typically defines the bottom. While it is almost
impossible to pinpoint the exact day of defeat, we believe we are close
enough to start to be more aggressive accumulating a broader range of
stocks than we have been focused on over the last month or so. Because
so many people appear to be scrambling to accurately forecast the
bottom, we believe the actual day may happen sooner than the majority
expects.
WHICH STOCKS NOW?: Despite current apparent lack of discrimination, we
remain convinced that stock prices will tend to mirror underlying
fundamentals over time, with the winners eventually growing into
significantly higher valuations. Because we expect June quarter results
will exceed expectations at least as much as we saw in the March
quarter, we expect the next reporting season will be a positive catalyst
for the group. We are hoping for greater differentiation on the rebound
between the big and small franchises. With so many recent IPOs, we
believe it takes time for investors to appreciate new stocks.
Today, we would recommend starting to build a basket of stocks, still
over-weighting the leaders, but now including some of the emerging
companies. We tend to rank these stocks by looking for near-term
catalysts and valuations that appear reasonable to us relative to
individual company market opportunities. As such, we would start with
the seasoned stocks first and the larger, unseasoned stocks.
We define the seasoned stocks as those that have been around for awhile
and that investors acknowledge as winners. Among the larger seasoned
names are Amazon.com, AOL, CNET, CMGI, eBay, Lycos, TicketMaster
Online-CitySearch, and Yahoo! Among the smaller group of seasoned
stocks are InfoSpace and Digital River.
The unseasoned stocks include the recent IPOs and those companies still
suffering from competitive confusion. Among the larger unseasoned names
are Gemstar, Network Solutions, and Priceline. Among the smaller
unseasoned names are Modem Media Poppe Tyson, Multex, NetGravity,
NetPerceptions, and SportsLine.
In each case above, we have confidence in June quarter estimates and the
ability of each stock to rebound. Comments on selected stocks follow
below.
PERFORMANCE REVIEW: As we prepare ourselves for a turnaround, we
believe it is important to review where each of our indexes has landed
after the past few weeks of decline.
This week, the NETDEX index fell 8.4% from last week to 921.13. The
NETDEX is down 20% from its recent high on April 22nd of $1056.67 and
down 26.5% from its 52-week high of $1148.55. For comparison, the NASDAQ
ended the week down 4.5% from last week, and down 6.9% from its 52-week
high.
Gemstar- Gemstar continues to play a poker game where the stakes are
ownership of a new advertising platform based on its interactive
television guide. We believe a new card this week significantly
strengthened its hand, leaving the stock as one of our strongest
recommendations. This week, AOL signed a licensing pact to use
Gemstar‚s Electronic Programming Guide (EPG) in its AOL TV, which AOL
plans to launch in 2000. We estimate AOL will pay Gemstar roughly $5 per
member per year as a royalty for each AOL TV member. In addition, AOL
will share revenue from advertising and commerce at an undisclosed rate,
which we estimate could be in the range of 10% to 25% to Gemstar. For
reference, we believe Microsoft pays Gemstar a license fee of just under
$10 per copy, and shares approximately 20% to 30% in advertising
revenues to Gemstar. We believe that Gemstar‚s EPG can also become a
television-based portal to the Web, connecting television screens to
HTML pages for such applications as shopping and browsing. We believe
AOL‚s decision, after the company spent significant time researching its
programming guide options, essentially validating Gemstar‚s patent
position. This could provide a strong indication of Gemstar‚s
likelihood of succeeding in litigation with United Video and General
Instrument, either by settlement or court judgement. We expect news
within the next three months. We continue to believe that the story is
under-appreciated, given the potential for more usage and related
advertising than almost any Internet company. Regardless of the outcome
of this nuisance litigation, we believe the advertising opportunity
provides upside to our estimates and suggest the potential for stock
appreciation measured in multiples of current levels.
AOL ˆ With the stock down 30% from its April high, we are tempted, but
remain challenged to see near-term strategic catalysts. We have faith
that AOL will be able to secure faster speed access for its customers,
despite with perceived broadband competition, given increasing evidence
of customer loyalty. After a recent analyst meeting, we remain
impressed by the company‚s ability to capture more time and money,
particularly from shopping. Over 95% of merchants on AOL Shopping renew
their contracts, almost always for larger deals, often as much as 5
times greater. We wonder how big the 1999 AOL holiday eCommerce season
could be? During the 1998 holiday shopping season, AOL members spent
$1.2 billion. In the month of March, members spent $727 million, more
than in the month of December 1998, and March saw 1.7 million first-time
buyers. Could Christmas 1999 be $10 billion? Could Christmas 2000 be
$50 billion? We believe rental payments from merchants to AOL should
drive profits higher than our estimates.
Lycos ˆ Lycos is off just 6.3% from its April high. We expect Lycos to
return to and move past its previous highs. We are impressed with
Lycos‚ recent traffic growth and believe the company shows strong
prospects for continued growth. We believe there is potential for
upside as LCOS continues to translate its growing reach into revenue.
We expect LCOS to continue its focus on partnerships, acquisitions,
commerce deals and/or sales, which should allow the company to grow
further. We have been encouraged by the favorable reaction that LCOS
stock has shown from both the merger termination, subsequent partnership
with TMCS and Q3 earnings results. While we believe that this news may
be reflected in the stock, we see potential for several near-term
catalysts, including acquisitions and faster internal growth.
Ticketmaster Online-CitySearch ˆ TMCS is down over 30% from its
mid-April high. We view TMCS as a stand-out franchise, with a ticketing
business that continues to blow away estimates, the Internet‚s leading
local city guide network. The revived management team appears to be
running faster than ever. At its current market value of just under $2
billion, TMCS is valued at just under $600 per each of its 3.3 million
unique users. This is compared with newspaper companies Gannett, Knight
Ridder, Times Mirror, Dow Jones, and New York Times, which are valued at
an average of over $2,000 per reader, and does not include the ticketing
business. We believe we will continue to have the chance to raise
estimates for TMCS as the company continues to increase its penetration
into user‚s local lives, most recently with the acquisition of an online
dating service. Catalysts can include more acquisitions.
Network Solutions ˆ Network Solutions is off 47.4% from its early April
high. This week, the company appointed a new CEO this week after a long
search. James Rutt previously served as CTO of The Thomson Corporation,
one of the world's leading information-publishing companies. He appears
to bring valuable experience to NSOL's effort to expand its business
model. We believe we will continue to see NSOL extend its reach through
additional marketing deals over the coming weeks, exposing the company
to more potential domain name applicants. We believe fears of
competition are over-exaggerated. For example, we see minimal threat in
this week's news that ICANN named NetNation Communications, a Canadian
ISP, as the latest qualified registrar. We believe NSOL's series of
marketing partnerships with some of the largest sites on the Web
including Yahoo and Netscape, and the company's numerous deals with
ISPs, give it a nearly insurmountable head start. At current levels the
stock is approximately 60x our EPS estimate of $1.00. We believe our
estimates will prove very low as it includes conservative registration
growth, which has consistently tracked well ahead of plan, and zero
revenue from new products, which the company is rolling out
aggressively. We believe we may see news from ICANN regarding the
finalized registry price NSOL can charge its competitors in mid-June,
followed by strong June quarter results.
SportsLine ˆ SportsLine is down 36.3% from its April high. We believe
SportsLine‚s continuing strategic and marketing efforts will eventually
be rewarded by a leading and profitable position in this space. This
week, in a multi-year exclusive agreement, SportsLine was selected to
produce and host the official Web sites of Major League Baseball. The
League‚s official Web site will be re-launched in mid-June. SportsLine
will be responsible for all advertising and sponsorship sales, with a
50/50 revenue share after SportsLine reaches minimum guarantees and net
of certain expenses, making the effective split better MLB online store.
The site will be promoted on MLB‚s national broadcasts, utilizing 30% of
its promotional broadcast time.
eTailing Update ˆ Lauren Cooks Levitan 415-693-3309,
mailto:lauren@rsco.com
WHICH ETAILERS OFFER THE BIGGEST UPSIDE? - We ask ourselves where will
people shop in five years and which brands will survive the feverish
competition. In our opinion, the franchise names, including Amazon,
Priceline, and eBay have the brightest long-term potential and should
rebound quicker than most of the other eTailers.
AMAZON ˆ ABOVE & BEYOND COMPARISON TO BARNESANDNOBLE.COM - While most
eTailers seem to be compared to Amazon given its franchise status and
valuation, we are challenged to understand the relative valuation of the
Internet‚s leading eTailer and this week‚s IPO of barnesandnoble.com
(BNBN). In our opinion, the most important difference between the two is
how online shoppers will perceive their brands as eTailing evolves. We
believe online shoppers associate BNBN‚s brand with Barnes & Noble‚s
retail stores, such that the company‚s online could potentially be
limited to sales of just books, music, and videos. We view BNBN as a
case where a significant bricks-and-mortar presence, while helping to
jump-start online efforts, effectively caps an open-ended eTailing
opportunity through the brand‚s perception in the physical world. In our
opinion, Amazon‚s dominant online brand and book share (which we
estimate at over 80% compared to BNBN‚s 10% share) should warrant a
higher multiple (we note Amazon and BNBN trade at 10.6 times and 13.8
times 2000 revenues based on our estimates of $2 billion and $260
million in sales, respectively). More importantly, we feel Amazon‚s
business model is evolving from that of a pure-play eTailer of books,
etc.. to future shopping portal, where we believe leverage and
scalability really starts to drive a superior business model with
multiple high margin revenue opportunities. We believe BNBN‚s brand and
positioning limits its ability to shift from Web tenant to Web landlord.
Currently trading over 40% off recent highs, we strongly recommend
purchase of Amazon‚s shares during this period of market weakness and in
advance of announcements that we believe will point to Amazon‚s growing
presence as a true eTailing portal.
PRICELINE ˆ SUPERSTAR ON THE RISE ˆ Priceline is down almost 25% from
its recent April high. We view Priceline as eTailing‚s emerging
franchise. While travel is already gaining traction and riding along
smoothly, we believe the product categories where Priceline‚s „name your
price‰ business model makes the most sense are still using training
wheels or have yet to get on the bike. We view wireless and financial
services as strong target markets and are awed by the opportunities for
business-to-business transactions, which we estimate will dwarf
business-to-consumer sales in absolute dollars over time. In addition to
Priceline‚s channels for growth, we believe the company‚s patents on its
shopping format are highly defensible. With the proceeds from the
company‚s recent IPO, we believe Priceline can vigorously defend its
patents. We believe Priceline will trade back up to and beyond previous
highs as additional category announcements are made.
EBAY ˆ ETAILING‚S PROFITABLE FRANCHISE ˆ eBay is down 16.7% from its
recent high. We believe eBay‚s profitable business model distinguishes
it from the eTailing pack. In addition, we believe the company‚s
expansion opportunities, including further penetration of local and
international markets as well as through investment and acquisition,
point to a scalable business model with tremendous long-term growth
potential. We believe eBay is uniquely positioned to leverage its
virtually unlimited product offering and growing auction expertise in
collectibles such as automobiles to its growing critical mass of over
3.8 million customers.
VALUE AMERICA ˆ A NEW NAME DESERVING ATTENTION - Value America, off
62.5% from its post-IPO high, continues to demonstrate impressive
marketing momentum, by our estimates. We expect its strategy will be
successful. The company‚s relationships with manufacturers and OEM
status with IBM allows the company to offer customers deep discounts on
name brand products without creating the same potential friction in the
supply chain as other eTailers offering products at or below cost.
Evidence to this fact is last week‚s announcement from Compaq, which
named Value America as a preferred eTailer for its Presario line of
computers. Recall Compaq stopped shipping that particular line of
computers to eTailers earlier in the year after receiving complaints of
unfair pricing from traditional retailers. Further, we believe Value
America distinguishes itself through its ability to capture large groups
of customers through the use of affinity programs. Near-term catalysts
could include agreements with affiliated stores.
MAY WE FORCE THE ISSUE- Members of our research team were recently
extremely disappointed when, after purchasing tickets more than a week
in advance to The Phantom Menace via moviefone.com, the showing ended up
being oversold and they could not get in. Although this was one
isolated incident, it points to the high expectations of online
shoppers, and the need to have back-end capabilities in place that
support the front-end shopping experience. Real-time inventory
management will be a crucial factor in satisfying customer expectations
and ultimately deciding which online companies win or lose.
MORE MAY FLOWERS - The importance of being the biggest and fastest to
market, evidenced by the activities of toy retailers last week, was
illustrated again this week by internet florists. Ftd.com filed plans
for a $90 million IPO, followed the next day by 1-800-Flowers.com, which
filed for a $150 million IPO, bringing the total amount of internet
florist currently in registration to four. In other news, Federated
Department Stores Inc., owner of eight department store chains including
Bloomingdale‚s and Macy‚s, acquired a 20% stake in the
WeddingChannel.com. The move highlights the natural synergies between
traditional retailing and online registry, and underscores the potential
offered by online registry that we have been expecting to attract a
great deal of attention.
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Rating 5/26 5/19 1-Wk 52-Wk Chg
Chg High 52Wk Hi
5/19 - to 5/26
5/26 Price
Amazon AMZN SBUY 121 130 4/5 -8% 221 1/4 -45.3%
Am Online AOL SBUY 120 1/3 129 * -7% 175 1/2 -31.4%
AutoWeb AWEB BUY 14 18 * -25% 50 -71.9%
Beyond.com BYND BUY 19 22 4/5 -17% 41 1/3 -54.2%
CDnow CDNW MP 17 4/9 18 3/8 -5% 39 1/4 -55.6%
CMGI CMGI LTA 201 * 238 * -16% 330 -39.0%
CNET CNET BUY 105 125 * -16% 159 1/2 -34.1%
Dig River DRIV BUY 21 7/8 31 2/3 -31% 61 3/8 -64.4%
DoubleClick DCLK BUY 90 * 113 * -21% 176 -48.7%
Ebay EBAY BUY 174 1/3 186 5/8 -7% 234 -25.5%
Egghead EGGS BUY 10 2/3 13 -17% 40 1/4 -73.4%
E*Trade EGRP BUY 44 * 108 3/8 -59% 72 1/4 -38.1%
Excite XCIT NR 130 140 1/5 -7% 187 7/8 -30.8%
Gemstar GMST SBUY 61 59 * 2% 64 -4.7%
Getty GETY BUY 22 4/7 25 7/8 -13% 30 1/2 -26.0%
InfoSpace INSP BUY 38 2/3 52 * -27% 72 5/8 -46.7%
Lycos LCOS BUY 102 110 * -7% 145 3/8 -29.8%
Modem Media
Poppe Tyson MMPT BUY 27 24 * 11% 55 1/8 -51.0%
Multex.com MLTX BUY 29 * 36 -17% 72 1/6 -58.8%
NetGravity NETG BUY 18 4/5 21 * -13% 66 7/8 -71.9%
Net Sols NSOL BUY 60 * 65 4/7 -7% 153 3/4 -60.5%
NewsEdge NEWZ MP 8 3/8 9 * -12% 14 1/4 -41.2%
Onsale ONSL BUY 18 3/8 21 7/8 -16% 108 -83.0%
Priceline PCLN SBUY 113 7/9 134 3/8 -15% 165 -31.0%
Prev Travel PTVL BUY 17 22 4/9 -24% 44 -61.2%
Infoseek SEEK MP 42 1/8 45 * -7% 100 -57.9%
SportsLnUSA SPLN BUY 34 * 33 4/9 4% 59 1/4 -41.4%
TicketMaster Online
CitySearch TMCS BUY 27 * 32 5/8 -15% 80 1/2 -65.5%
Xoom.com XMCM BUY 46 * 65 4/9 -29% 98 1/2 -52.5%
Yahoo! YHOO BUY 140 7/8 151 * -7% 244 -42.3%
NETDEX Index
NETDEX 844.06 921.13 -8.4% 1,148.55 -26.5%
KEBDEX Index
KEBDEX 1,291.63 1,406.45 -8.2% 1,757.25 -26.5%
NASDAQ Composite Index
COMQ 2,427.18 2,542.23 -4.5% N/A -6.9%(1)
(1) Change based on last 12-month's performance.
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, InfoSpace.com,
Lycos, Microsoft Corporation, Modem Media, NetGravity, Network
Solutions, NewsEdge, N2K, ONSALE, Preview Travel, Priceline.com,
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,
InfoSpace.com, Modem Media, NetGravity, ONSALE, Preview Travel,
Priceline.com, 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 ˆ 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 ˆ 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 ˆ Rating for a stock, which we believe could have
long-term value, however we would not necessarily recommend buying.
Market Performer ˆ Rating for a stock, which we believe will perform at,
or below, market levels.
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Unless otherwise noted, prices are as of the close Wednesday, May 26,
1999.
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
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Copyright * 1999 BancBoston Robertson Stephens Inc.
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