BBRS's Complete Weekly Web Report...FYI...
<<BANCBOSTON ROBERTSON STEPHENS
Keith E. Benjamin, CFA - 415-693-3285
mailto:Keith@rsco.com
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June 4, 1999
The Web Report – Volume 2, Issue #22
This week, the NETDEX index fell 9.6% from last week to 537.75. For
comparison, the NASDAQ ended the week down 1.0% from last week, and down
7.8% from its 52-week high.
BEST OF TIMES, NOT WORST OF TIMES – We firmly believe there is a real
economic shift towards Web commerce that will drive June quarter results
above estimates and yield a big catalyst for many, but not all of the
Internet stocks. Unfortunately, the stocks in our coverage group
declined another 5%-10% on average this week. While many investors may
want to use the recent decline in stock prices as a justification for
why they did not own these stocks on the way up, we see the psychology
turning with bottoms being tested now. We believe it is critical to
remain disciplined during this test and aggressively accumulate the
stocks of those companies demonstrating the best new businesses, both
large and small. We have tended to write more about the larger
companies, with commentary this week about competitive issues among the
leading eTailers.
BROADENING COVERAGE - We believe it is appropriate to broaden our buying
and writing focus to some of the smaller and medium sized
opportunities. Our coverage includes the major networks, major
channels, content components, direct marketing companies, and emerging
e-business companies. Among the major networks, we still favor AOL,
Lycos, and TicketMaster CitySearch. Among the major channels, we rank
CNET and SportsLine near the top of our list. A few companies have
emerged to provide outsourced content and services to these networks,
including Infospace and Mapquest. Multex is providing outsource
services to the financial markets, effectively becoming the online
research network, reaching both institutional, corporate and now retail
investors. We find Mapquest's stock particularly attractive today near
its recent IPO price. Also providing service to the networks and
eTailers, there are a host of eMarketing companies, each helping to
connect eMerchants with customers. Our eMarketing companies include
ModemMedia Poppe Tyson, NetGravity, and Media Metrix. Consumers are not
the only Web buyers. We believe the biggest markets will be servicing
businesses. Network Solutions provides the eBusiness starting point
with a Web address and now other services. Digital River enables
software publishers and now other businesses to use the Web for product
delivery on a turnkey, outsource basis. Getty is now more rapidly
bringing the delivery of images to the Web. All of these stocks appear
to be lost in the categorization of Web stocks as more half empty than
full. Many of these companies share attractive competitive and business
model characteristics, such as profitable outsource services for
businesses. We believe the sentiment will turn quickly as investors
focus on fundamentals.
INFOSPACE.COM – INSP has established contracts with leading Web networks
to supply a broadening range of content, from white pages to yellow
pages. Because of its outsource model, it is able to grow with little
marketing spending, leveraging that of its partners. With most of its
revenue streams growing in step with traffic at its affiliates' Web
sites, we view INSP as a proxy for Web growth, with minimal competitive
risk, in our view. The company is positioned to continue growing in
tandem with the proliferation of non-PC Web devices, which we expect are
starting to sneak up on us as a major new platform. We believe our
estimates are very low, based on the company's short history of vastly
exceeding estimates. We expect INSP to grow as fast, or faster, than
the Web, allowing it to grow into a big valuation.
MAPQUEST – MQST is another great example of the power of outsourcing
content to consumer sites, with upside from its own branded site, and a
potentially vast opportunity to reach the growing millions of business
sites. We initiated coverage this week on MQST with a Buy rating. The
company offers 3 major products: Business, Consumer and Digital Mapping
Services. We believe MQST's competitive advantage is its investment in
the “baking process”: taking raw cartographic data from outside sources
combined with proprietary data to generate a broad product line. We
believe our estimates for MQST's business could prove extremely low
given the millions of businesses coming online. We believe the company
can potentially license its products and services to every business on
the Web. MQST currently has over 500 business customers and is adding
30-40 per month. We believe there is significant upside to our consumer
estimates from post-IPO marketing, new products, and international
expansion. We expect positive results when MQST reports earnings next
Tuesday, June 8th.
MULTEX - We believe MLTX can be very successful as a new service for
retail investors. A leading provider of on-line investment research and
information services, we view Multex Investor Network (MIN) as an online
financial community of individual investors. Currently, MIN provides 1.2
million investment research reports from over 500 contributors and has
350,000 registered users. MLTX is creating value-added content on MIN
through its Analyst Corner, Investment Ideas and Talk sites, which in
turn will drive traffic on MIN. In addition, MLTX has signed
partnerships with leading portals such as Intuit.com, MarketWatch.com,
TheStreet.com, PCQuote.com and AOL, to be the exclusive provider of
investment research information. We continue to expect upside in
revenues and earnings from MIN, as the company adds more research and
services. We believe near-term catalysts to include faster growth of MIN
members.
MODEM MEDIA POPPE TYSON – More companies are using the Web to reach new
customers. Unlike traditional advertising agencies, MMPT started with
an exclusive focus on new media. MMPT has established a leading
reputation by virtue of concentrating on fewer, larger clients. Its
business model starts with providing the blue print for an online
presence and marketing campaign, from site design to media spending,
earning service fees on essentially a cost-plus basis. MMPT has
demonstrated both growth in number of clients and revenues per client,
enabling operating leverage. We believe there could be considerable
upside in the model as clients adopt a more profitable
pay-per-customer-delivered model. We believe MMPT has been overlooked
since its IPO, even though it has shown strong results. We believe
MMPT's impressive results in a seasonally slow Q1 demonstrate the
strength of the team and strategy. We believe the range of possible EPS
before amortization in 2002 is from $0.50 to $1.00 or higher as the
pay-for-performance model materializes. This EPS potential does not
appear to be reflected in the current stock price.
NETGRAVITY - We believe NETG's business continues to be strong despite
growing concerns over competitive pressure. We believe that the need
for advertising targeting software both on a license and outsource basis
is proving large enough to support multiple competitors, albeit with
some swapping. However, the inconvenience of switching appears to make
it easier to adopt a competitive strategy of acquisition as opposed to
poaching. The challenge seems to be one of negotiation between stocks
with wide and volatile variances in valuation. We believe NETG's
fundamental position remains strong. We would not be surprised if NETG
loses a few customers over time but we would also expect that the
company could gain several new customers from competitors. Currently,
we estimate that no one customer accounts for more than 2% of revenue so
any one or two customer losses would not materially impact our
estimates. In addition, we believe that as the company expands its
AdCenter product line, it will enhance its ability to satisfy existing
licensing customers, which may want to move to an outsourced service,
which strengthens NetGravity's competitive position. With the stock
trading at roughly half the revenue multiple of competitors DoubleClick
and AdForce, we believe there is a lot of upside as consistent execution
overcomes competitive concerns. We also still believe the company is a
logical acquisition target for several companies.
NET PERCEPTIONS - NETP has developed recommendation engine software
which it uses as a foundation for specific products aimed at various
selling and marketing functions across multiple Web applications. NETP
in essence creates a “virtual shopkeeper”, that learns what products a
customer likes/dislikes and makes appropriate recommendations in real
time. We believe Q1 will again demonstrate the strength of the
company's core eCommerce product. Looking forward, this appears to be
an inherently profitable model, with rapid customer growth and new
products potentially enabling the company to significantly exceed our
estimates. We believe the company is defining this new function with no
clear competition. As an indication of its emergence as the standard,
NETP recently announced a partnership with NetGravity to integrate its
recommendation technology with NetGravity's advertising serving software
for customers in common. We believe NETPs' technology can be applied to
other services, providing a base for expansion. We believe the
company's opportunity has not yet been reflected in the stock price.
MEDIA METRIX – MMXI has defined the standard for Web measurement, in our
view. We initiated coverage this week on MMXI with a Buy rating
following its recent initial public offering of 3.0 million shares at
$17 per share. Media Metrix is the leader in Internet audience
measurement products and services. The company's data are used by
advertisers, ad agencies, Internet companies, and financial institutions
to measure traffic, set advertising rates, and assess overall
performance. We believe that Media Metrix' significant first-mover
advantage, superior technology, and solid management have driven the
creation of the leading brand name in its category. MMXI's data have
become the yardstick with which advertisers and publishers assess
Internet audience metrics and advertising rates. The only obvious
near-term rival to MMXI's leadership position is Nielsen's NetRatings
which we believe is at least one year behind in terms of both product
and customer development. In television and radio, audience measurement
services typically generate revenue equal to 1% of total advertising
spending, with the market leader earning a majority of this. We believe
that Internet ad revenue could approach $15 billion by 2002, implying
audience measurement revenue of $150 million. In our view, MMXI could
capture a majority of this. We believe that our estimates are
conservative, with upside coming from faster-than-expected addition of
new customers and from up-selling customers from basic reports to more
services and customized reports.
NETWORK SOLUTIONS – This stock has been plagued by competitive
confusion, with the next act in this drama about to be played. Within a
week or two, we expect ICANN to announce the price paid to NSOL for
registrations made by other sales agents. The temporary price was set
at $9 per year. We expect the price to scale down a bit as NSOL reaches
registration milestones, probably measured in multiple millions. Our
best guess is that the floor may reach $5 per year, but this appears to
be more of a political than economic decision. Regardless, it is only
relevant to the degree anybody else registers any significant number of
names. We believe the company's marketing muscle will again allow it to
post powerful growth in domain name registrations for the June quarter,
with almost all of the wanna-be competitors still looking for a business
plan. As such, we expect the stock to recover with the numbers.
DIGITAL RIVER – Digital River has been working for many years on
Web-based technology to enable delivery of product groups with a vast
range of SKUs. Its first application is to enable software publishers
and on-line retailers to deliver software by downloading. It hosts a
vast library and provides a complete outsource service. This alone will
prove a large market, with DRIV as leader, in our view. Recently, it
has been applying this fulfillment technology to other services,
including parts delivery for computer manufacturers. We expect to hear
more announcements of new partners over the next several months. We
believe DRIV can scale into a large, eBusiness company, which we do not
believe has been reflected in the stock.
GETTY – Getty has been making the transition from delivering its vast
library of images from off-line to online delivery. Its core business
has been to provide licensed photography and other images to
businesses. With the recent acquisition of Art.com, it expands its Web
product offerings for consumers. The company has appeared in limbo,
between a cash-generating media business model and an emerging Web
opportunity. We are encouraged that the company seems to be ready to
invest in faster growth and look for accelerated marketing spending and
more deals to provide catalysts for the stock.
eTailing Update – Lauren Cooks Levitan 415-693-3309
mailto:lauren@rsco.com
AMAZON – This week started off with Barron's scathing review of
Amazon.com's prospects that seemed longer on personal insults than
original or insightful content. To review the few points that the
author attempts to make, the tone is set by noting the large valuation,
suggesting that was a fault in and of itself, followed by a focus on
competitive risks. The first step is to talk about the growth in book
sales slowing from 825% to a range of 90%. This is the law of large
numbers and not bad, in our view. The next big threat proposed is
digital books downloaded into unreadable and expensive devices. We do
not expect that will be big soon. Next, authors and publishers may
start their own web sites. We believe multi-title aggregation will
remain convenient to the average book buyer. Then there is the old line
about existing retailers coming on stronger, with Barnes & Noble just
raising more money. Quotes are included to counter the belief that there
is a first-to-market advantage on the Web and that Wal-Mart will take
over when it decides. Of course, Amazon.com will always face execution
risk, but this article would not even have been written if the
leadership position was not the company's to lose. Price competition
clearly exists in the book business, but Amazon's repeat buyer
percentages are so high as to suggest it's not the critical factor in
the company's success. Service remains key, in our view. This explains
why the company is investing aggressively in building distribution
infrastructure. Unlike companies also burdened with stores, it should be
able to manage inventory far more efficiently and profitably. The
author does not seem to appreciate the need to differentiate between
gross margins and marketing investments to build the brand. It mentions
the new products brought into the site through partial acquisitions as a
defensive strategy, without noting the incremental high margins from
rent to other stores. Some people seem to relish in looking at stocks
as half full. For reference, many in the media challenged AOL on every
possible level, seeming to miss the point at every turn. We stand by
our view that Amazon.com has a great strategy and see every reason to
give the management the benefit of the doubt as it executes on that
strategy.
SIMILARITIES BETWEEN PRICELINE AND EBAY – Priceline.com, the site that
lets consumers name their own price for items where price is more
important than brand (and takes the supply and demand curves from
microeconomics class and converts them into a powerful business model),
continues to exhibit impressive momentum. Similar to eBay, Priceline's
business model simply could not exist without the Internet. Thus,
unlike other eTailers who are largely attempting to gain share from
land-based competitors, Priceline and eBay alike are completely changing
the way goods and services are exchanged. In these cases, it is more
difficult to size the opportunities given they are potentially much more
open-ended. Further, since control of supply has proved to be the
biggest hurdle, once achieved, concerns regarding competition become
much less meaningful. In the case of Priceline, the company's first
major category, airline travel, has firmly established the opportunity
while we believe future businesses (including applying the Priceline
model to business-to-business situations) hold even more promise. We
expect Priceline shares should benefit from the company's ability to
grow sales without corresponding massive investments in infrastructure
as well as from announcements regarding future categories, milestones
and deals. For these reasons, we expect share of both Priceline and
eBay to return to previous levels with upside well beyond.
DRUGSTORES ONLINE – STARTUPS VS. SPIN-OUTS – With the IPO filing of
Drugstore.com, a name-brand start-up funded by Kleiner Perkins, founded
by a top Microsoft executive, recently backed by Amazon.com, it might
almost seem as if the game was over at the beginning. We are big
believers in the advantages of being first with a hot brand, like the
intuitively strong “drugstore.com” address, combined with powerful
distribution, like the emerging land baron Amazon.com. However, with
similarly strong backing, PlanetRx boasts top VCs, including Sequoia,
impressive management with a CEO from Federal Express and AOL, and
enough money to mount an aggressive marketing campaign. Both are trying
to exploit online advantages to take share of the huge market for
prescription and non-prescription drugs and personal care items. While
we still expect to go to the drugstore for immediate needs, many items
are frequently repurchased and could easily be bought online. In
ancient times, your local pharmacist actually provided advice. Now, the
Web seems to be the best place for information about which vitamins to
take, which cold medicine fits best, or which prescription drugs might
react to each other.
But what about Walgreens, CVS, RiteAid and other land-based competitors
who are in various stages of articulating their online strategies? For
non-prescriptions items, we believe the start-ups may be able to move
faster and further. For prescriptions, however, the game appears to be
rigged in favor of those major retail chains which already have
affiliations with (or in certain cases also own) the Pharmacy Benefit
Managers (PBMs). What is a PBM?. Most of us have prescription cards
that we use to fill prescriptions with a co-payment. PBMs provide a
link between the pharmacy and your health insurance company, handling
authorization, payments and paperwork. PBMs are usually paid a fixed
fee per member per month by the insurance company. The PBM is at risk
for the cost of providing the benefit. Therefore, PBMs usually decide
which drugs to cover and which pharmacies should participate. Because
high volume pharmacies are more efficient at purchasing pharmaceuticals
and filling prescriptions, many PBMs have their own mail order
pharmacies to fill prescriptions for maintenance drugs. Examples of
partnerships include Merck-Medco/PAID Prescriptions, Express Scripts and
Rite-Aid/PCS. We believe there is no obvious incentive to include the
on-line, mail order pharmacies in their networks.
Effectively, PBMs control the prescription game. If you go to an online
drugstore that is not connected (or in the network) of your PBM, you
would need to pay cash and file a claim for repayment, a major
inconvenience with a slim chance of a positive outcome. It is still not
clear how the online start-ups will get around this challenge, although
there may be a legal or regulatory case for open access. Still, we
believe the online drugstores will have a big enough market opportunity
to build big businesses. We will continue to monitor this evolving
space looking for further strategic alliances and partnerships. For
example, we wonder how Merck-Medco (which holds power not only as a
leading pharmaceutical company but also as a leading PBM and mail order
pharmacy) will address the online opportunity. In addition to the
Web-based retail innovators and the land-based diversified giants like
Walgreens, in this arena the PBMs and pharmaceutical companies are also
significant players that can significantly affect who those eventual
winners might be.
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Rating 6/03 5/26 1-Wk 52-Wk Chg
Chg High 52Wk Hi
5/26 - to 6/03
6/03 Price
Amazon AMZN SBUY 105 121 -13% 221 1/4 -52.5%
America Online AOL SBUY 105 3/4 120 1/3 -12% 175 1/2 -39.7%
AutoWeb AWEB BUY 13 7/8 14 -1% 50 -72.3%
Beyond.com BYND BUY 17 4/9 19 -8% 41 1/3 -57.8%
CDnow CDNW MP 18 1/5 17 4/9 4% 39 1/4 -53.7%
CMGI CMGI LTA 89 1/8 100 5/8 -11% 165 -46.0%
CNET CNET BUY 45 52 1/2 -14% 79 3/4 -43.5%
Digital River DRIV BUY 22 1/4 21 7/8 2% 61 3/8 -63.7%
DoubleClick DCLK BUY 85 1/8 90 1/4 -6% 176 -51.6%
Ebay EBAY BUY 161 1/3 174 1/3 -7% 234 -31.1%
Egghead EGGS BUY 10 4/7 10 2/3 -1% 40 1/4 -73.8%
E*Trade EGRP BUY 37 3/8 44 3/4 -16% 72 1/4 -48.3%
Excite XCIT NR 133 130 2% 187 7/8 -29.2%
Gemstar GMST SBUY 57 5/8 61 -6% 64 -10.0%
Getty GETY BUY 22 1/4 22 4/7 -1% 30 1/2 -27.0%
InfoSpace.com INSP BUY 38 3/4 38 2/3 0% 72 5/8 -46.6%
Lycos LCOS BUY 88 102 -14% 145 3/8 -39.5%
Modem Media
Poppe Tyson MMPT BUY 27 1/8 27 0% 55 1/8 -50.8%
Multex.com MLTX BUY 28 1/4 29 3/4 -5% 72 1/6 -60.9%
Mapquest.com MQST BUY 15 15 5/8 -4% 37 -59.3%
Media Metrix MMXI BUY 41 44 5/8 -8% 56 5/8 -27.7%
NetGravity NETG BUY 17 18 4/5 -10% 66 7/8 -74.6%
Net Percepts NETP BUY 15 7/8 17 -7% 35 -54.6%
Network Sols NSOL BUY 52 3/8 60 3/4 -14% 153 3/4 -65.9%
NewsEdge NEWZ MP 7 7/8 8 3/8 -6% 14 1/4 -44.7%
Onsale ONSL BUY 17 4/5 18 3/8 -3% 108 -83.5%
Priceline.com PCLN SBUY 84 1/8 113 7/9 -26% 165 -49.0%
Preview Travel PTVL BUY 15 17 -12% 44 -66.1%
Infoseek SEEK MP 37 4/9 42 1/8 -11% 100 -62.6%
SportsLine USA SPLN BUY 33 1/3 34 3/4 -4% 59 1/4 -43.8%
TicketMaster Online
CitySearch TMCS BUY 24 1/3 27 3/4 -12% 80 1/2 -69.8%
Value America VUSA BUY 16 4/7 18 7/8 -12% 74 1/4 -77.7%
Xoom.com XMCM BUY 42 46 3/4 -10% 98 1/2 -57.4%
Yahoo! YHOO BUY 135 3/8 140 7/8 -4% 244 -44.5%
NETDEX Index
NETDEX 537.75 594.94 -9.6% 801.41 -32.9%
KEBDEX Index
KEBDEX 842.90 947.52 -11.0% 1,273.17 -33.8%
NASDAQ Composite Index
COMQ 2,403.32 2,427.18 -1.0% N/A -7.8%(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, Mapquest, Media Metrix, 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, Mapquest, Media Metrix, 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 – 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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Unless otherwise noted, prices are as of the close Thursday, June 5,
1999.
FOR ADDITIONAL INFORMATION, PLEASE CALL YOUR BANCBOSTON ROBERTSON
STEPHENS REPRESENTATIVE AT (415) 781-9700.>> |
