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StreetAuthority Market Advisor for March 3rd, 2003 In this week's issue we'll begin by giving you a bit of background on the Internet industry and we'll introduce you to the wide range of Internet-related businesses now in existence. My staff and I will then bring you an in-depth analysis of many of today's largest and most heavily-traded Internet stocks. In the process, we'll distinguish between those remaining publicly traded dot-coms that we think will thrive over the long run and those that could be destined to die a slow death. As an investor, your ability to separate the contenders from the pretenders in this industry could mean the difference between healthy profits and substantial losses in 2003 and beyond, so we sincerely hope you enjoy today's issue!
Table of Contents: The dot-com frenzy of the late 1990s was quite a sight to see. With irrational exuberance in full swing, stock prices regularly skyrocketed 10%, 30%... even 50% or more on a given day, and any firm with ".com" in its corporate title automatically became a smashing success on Wall Street. At the time, investors were all abuzz with talk of page views, brand value and web traffic. In addition, analysts were downright giddy over the seemingly unlimited potential offered by these up-and-coming corporate Internet titans (or perhaps they were just blinded by juicy underwriting fees and fat holiday bonuses). No matter what their motives (whether to invest for the long haul or just to make a quick buck), millions of investors and analysts became enamored with the dot-com industry back in its heyday, helping push share prices to unsustainable heights. By the spring of 2000, Wall Street and the over-hyped Internet industry were overdue for a reality check. The high-tech bubble finally burst, and many dot-coms finally got their justified dot-comeuppance (I hope you don't mind a little humor here). Thousands of Internet firms without proper business models went belly-up in one of the swiftest stock market and industry corrections in modern history. The dot-com world, as least as we once knew it, had come to an end. Several years have since passed, and the flood of media coverage that once poured over the Internet age has slowed to a mere trickle, leaving many investors to mistakenly assume that the dot-com industry is dead. Yet that couldn't be further from the truth. Thousands of pure-play dot-coms still remain, and many are not only still listed on one of the major U.S. exchanges (the NYSE, AMEX or Nasdaq), but also still carry substantial market valuations in the hundreds of millions (and in some cases billions!) of dollars. Some of these hardy dot-coms are marginal firms that have proven strong enough to survive this long, but thanks to heavy debt burdens, ill-conceived business plans and changing industry dynamics, they're probably destined to die a slow death. However, others have built winning, competitive business models and are poised to enjoy years and years of lasting success. As an investor, your ability to separate the contenders from the pretenders could mean the difference between healthy profits and substantial losses in 2003 and beyond. With this in mind, my staff and I decided to take a closer look at a few of the better-known pure-play dot-coms that currently trade on one of the major U.S. exchanges. And because solid business prospects don't always translate into share price gains, we also took a look at each stock to determine whether it might be worth investing in at today's levels. So, without further ado, in today's issue we're pleased to bring you an extended list of dot-coms that are BUILT TO LAST, those that are WORTH A CLOSER LOOK, and those that could be RUNNING ON EMPTY. In doing so, we've made every attempt to give you our thoughts on a few of today's largest and most prominent pure-play Internet firms. But before we get to that, we thought it was important to present you with a comprehensive listing of major publicly-traded Internet companies. 2.) LISTING OF PUBLICLY-TRADED DOT-COMS Below you'll find a comprehensive listing of most publicly-traded Internet-related companies with market capitalizations above $200 million...
3.) INTERNET FIRMS
THAT ARE BUILT TO LAST Amazon.com (AMZN, $22) -- Online sales are still booming (the overall e-commerce industry saw sales jump 34% last year, to $17.44 billion), and Amazon has positioned itself as the undisputed leader in the Internet retailing space. This online superstore sells everything from books to electronics, and after years of struggling with high start-up costs, sales volumes have picked up and the firm has finally managed to swing to profitability. Amazon's long-term future looks bright thanks to the company's well-established position and key partnerships with traditional retailing giants such as Toys R Us (TOY) and Target (TGT). And while some investors have questioned whether or not Amazon will be able to remain in the black, I'm confident that the firm will remain a long-term winner in the retailing space. However, that doesn't necessarily make Amazon a great stock. On the heels of recent gains, the shares are now trading at a ludicrous 68X this year's 2003 EPS estimates. As such, I would not consider purchasing AMZN until I saw a drop back to the mid- or low-teens. Here's a look at a two-year chart for Amazon (we will include similar charts for all companies mentioned in today issue)...
eBay (EBAY, $78) -- This high-growth giant has taken a commanding lead in the lucrative online auction market... a lead that it should have no trouble maintaining. I love eBay's inventory-free business model, strong financial track record, new acquisitions, and the host of advantages -- such as economies of scale and proprietary technology -- that the firm enjoys over the competition. And while the shares trade at a rich PE multiple, eBay's valuation isn't completely outlandish when you account for the company's tremendous growth potential. Still, with the stock now at $78 and the firm expected to earn just $1.31 cents per share this year, valuation concerns could continue to weigh on the stock in the near term. But if you're a long-term investor and you believe -- like I do -- that eBay will remain one of the world's most impressive growth stories in the coming decade, then you may want to jump in now and continue to add to your position should the stock experience any near-term weakness. More risk-averse investors, on the other hand, would be better off waiting for a more attractive entry point (possibly in the low-$50s) before investing in eBay.
-------------------------- USA Interactive (USAI, $25) -- This firm operates a diverse lineup of electronic commerce and media outlets, including Expedia.com (EXPE), Ticketmaster (TMCS), Match.com, Home Shopping Network and Hotels.com (ROOM). Despite the economic slowdown, each and every one of these business units has posted strong growth in recent quarters. In particular, the firm's Expedia.com and Match.com subsidiaries have been on an absolute tear, boasting year-over-year sales growth of 100% and 111% in the fourth quarter of 2002, respectively. With continued expansion of its existing business lines, strong free cash flow due to its new transaction-based focus, $2.9 billion of cash and marketable securities in the bank, and a number of potentially lucrative new acquisition candidates on the horizon, USA Interactive appears to be in excellent shape at the moment. However, its stock is an entirely different story right now. USAI tends to be extremely volatile and is currently trading at a multiple that is far too rich for my blood. For those with longer-term time horizons, the shares could perform well in the coming years. Buyer beware though: You should only consider USAI if you're willing to sit back and wait at least five years for CEO Barry Diller's e-commerce vision to become a reality. But given how quickly this business moves and how frequently the deal-making Mr. Diller has been known to change his business mix and strategy, USA Interactive could be an entirely different firm by then. That makes it extremely hard to predict the company's future revenue and earnings stream, so one really needs to have a great deal of confidence in the firm's management in order to invest here. In addition, it's worth noting that even though it is currently an industry leader in many categories, the barriers to entry in some of the firm's existing business lines (like travel and online dating) are fairly low, so USA's continued leadership in these markets is anything but certain. Given all of the aforementioned risk factors, I would need a substantial margin of safety before I'd invest in the firm. Until the shares drop back to at least the mid-teens, I'm going to stay on the sidelines here. But even though the stock might not be a screaming buy at current levels, I think the company's focus on profitable, transaction-based Internet sites will pay off over the long run.
SPECIAL NOTE: If you like this analysis and you're currently a limited-time TRIAL MEMBER of the StreetAuthority Market Advisor, then you'll need to subscribe soon to ensure continued delivery of this newsletter. The StreetAuthority Market Advisor retails for $199 per year, but if you act now you can take advantage of a special, limited-time discount offer of just $97 per year. Please CLICK HERE to subscribe today and lock in this special savings. We'll also send you two FREE in-depth research reports as a thank-you for your order! 4.) DOT-COMS WORTH A CLOSER LOOK The following Internet-related companies are worth taking a closer look at... PEC Solutions (PECS, $17)
-- PEC Solutions is a professional technology outsourcing firm that develops
Internet and other web-based applications primarily for federal and state
government entities. For example, the firm builds information systems for
criminal justice departments, delivers technology solutions to defense and
intelligence agencies, and provides management consulting services to the
INS (Immigration & Naturalization Service), among other things. PEC has
staked a strong foothold in the booming eGovernment solutions market in
recent years, allowing the firm to post tremendous revenue and earnings
growth (in the neighborhood of 70% for full-year 2002) in an otherwise rough
domestic IT market. I like the relative earnings stability PEC enjoys thanks
to the fact that its main customer -- the U.S. government -- has the deepest
pockets on the planet. In addition, PEC should benefit nicely from the
government's new homeland security push
-------------------------- Yahoo (YHOO, $21) -- With nearly 250 million customers worldwide and billions of page views per month, Yahoo is the world's most-frequently-visited Internet destination. The firm provides navigational services, software, business services and a variety of consumer-related content (information, email, etc...) on its web site at www.Yahoo.com. The company started exclusively as a web search engine, and has traditionally brought in the majority of its revenues from the highly-cyclical advertising market. However, in recent years management has made a concerted effort to diversify the company's revenue stream into other areas, and Yahoo now brings in about 40% of sales from fee-based and subscription services such as job listings, broadband access and personal ads. The firm should have no trouble riding out today's uncertain environment due to its sizable customer base, rock-solid balance sheet (zero debt, $1.5 billion in cash) and an improving advertising market. However, over the long run I'm concerned that Yahoo might fall prey to competitive forces. After all, the firm faces tough competition from substitute products/services in all of its markets, and it boasts very few strong competitive advantages over its rivals. Yahoo's main competitive weapon is its sizable customer base, yet it's important to keep in mind that these eyeballs could easily be diverted elsewhere in the years ahead. And as broadband proliferates around the globe and the Internet and TV begin to merge, will Yahoo be able to compete with well-entrenched content providers like AOL, MSN and others? Perhaps the firm will evolve and grow, and perhaps it will manage to not only keep its core customer base happy, but also to sell these folks on many of its new fee-paid offerings. Under this possible scenario, Yahoo has the potential to dominate the Internet world in the years ahead, all the while racking up sizable profits for investors. Another possible scenario, however, is that the firm could succumb to competitive pressures from AOL/MSN/others, alienate its core customer base by attempting to charge for too many services, and ultimately give up its role as top dog in the Internet realm. Should this happen, then investors are bound to be sorely disappointed. Which scenario will unfold in the years ahead? Unfortunately, no one really knows the answer to this question. Yahoo's future success or failure will hinge greatly on the tough decisions that management will be forced to make in the months and years ahead. Should Yahoo chart the proper course, then it will ultimately join the firms above as a company that is "Built To Last." But should it alienate its customer base, then the firm could soon be "Running on Empty." With the stock currently trading at a rich 70X this year's projected earnings, it looks like most investors believe that the positive scenario will unfold. But with its long-term prospects still marked by so much uncertainty, I wouldn't touch this stock at today's valuation levels. Of course, since Yahoo does hold tremendous long-term potential, the shares might be worth a closer look on any further pullbacks into the single-digit area.
5.) THOSE THAT ARE RUNNING ON EMPTY Thanks to heavy debt burdens, ill-conceived business plans and changing industry dynamics, the following companies could be headed for trouble in the years ahead... Netflix (NFLX, $17) -- I placed this money-losing firm on my "Stocks to Avoid Now List" shortly after it went public last year, and even though it is currently growing at a fast clip and the stock could continue higher in the near-term, I have no intention of removing it anytime soon -- Netflix is still a stock to avoid over the long run. The firm provides a unique online video subscription service to over one million subscribers across the country. Customers visit the firm's web site and choose which movie titles they'd like to see, then Netflix sends these films out in DVD format via U.S. mail. Subscribers are allowed to hold three DVD titles at any given time with no due dates, late fees or shipping charges. When customers are finished with a given movie title, they simply mail it back to Netflix in a pre-paid envelope. Netflix then automatically sends the next DVD on the subscriber's list. Netflix has a fascinating business model and the firm is growing like crazy right now, but I don't think this model is good enough to lead to sustained profitability over the long haul. The firm has done well with early adopters, but I'm concerned that it might not continue to grow its subscriber base at a fast clip in the years ahead. Also, given high shipping and other related costs, I'm not yet convinced that Netflix will be able to post substantial earnings over the long haul. Consensus expectations call for the firm to earn just 2 cents per share this year, but even though that estimate is likely to increase in the months ahead, I've chosen to look at the longer-term picture here. Ultimately, the only subscribers who are likely to fork over the firm's $20 a month fee (which adds up to a rich $240 per year) on a consistent basis for years to come are those who use the service very, very frequently. The problem for Netflix, of course, is that these subscribers represent the least-profitable segment of its customer base (due to higher shipping costs associated with mailing more movies each month). As its market becomes more and more saturated (those who would be willing to pay for Netflix's service will have already signed up) and its more-profitable customer base (those who do not view many movies per month) begin to cancel their subscriptions in the coming years, Netflix's growth is going to slow dramatically. In addition, DVD prices have been falling sharply in recent years, putting the company in direct competition with low-priced DVD sales. Finally, I've gone all this way without even mentioning the competition that Netflix faces from existing video chains, as well as the big bombshell that's about to hit this industry -- recordable DVDs. The technology is now available, DVD-R (recordable DVD disk) prices are falling, and if it doesn't already have movie rental industry CEOs shaking in their boots, just wait a year or two. DVD pirating might eventually become as widespread as music swapping. And if it does, are subscribers going to continue to rent DVDs for $20 a month when they can copy them at home for just $1 or $2 per disk? (Note: This is the primary reason why I have held Blockbuster (BBI) on my "Stocks to Avoid Now List" since 2001). Some will, but many won't. Netflix does have an interesting business model and it might manage to post solid growth this year, but I'd steer clear of the stock over the long haul.
-------------------------- Register.com (RCOM, $6) -- When key properties such as business.com and loans.com were selling for millions back in the dot-com heyday, the domain name land-grab became something of a national pastime for early Internet adopters. But my how quickly things have changed. Domain name registrations used to cost around $150 per year when only a handful of major players were involved in this market (primarily Network Solutions and Register.com), and strong resale values were enough to spur on heavy speculative domain buying. Nowadays, however, dozens of sites offer domain registrations for as little as $8.95 a year. I'm not sure how long Register.com can survive trying to sell what is essentially an identical, commodity-like product for a comparatively pricey $35 a year. The firm's revenues declined to $106 million last year from $116 million in 2001, and Register.com has seen its profits quickly turn to losses in recent quarters. The firm is now essentially selling for its cash-per-share value, which stood at $217 million as of year-end 2002. In the near term the stock is likely to find support around current levels due to its sizable cash balance and the fact that at least two buyout firms are interested in taking the firm private. However, over the long run the shares are likely to struggle unless RCOM makes some significant changes to its underlying business by diversifying into other areas. With this long-term perspective in mind, I'd avoid the stock.
6.) COMING
IN NEXT WEEK'S ISSUE We will publish our next full issue of the StreetAuthority Market Advisor on Monday, March 10th. In it, I will take a closer look at the battered Retail sector and will give you an idea of which stocks I think could be poised for a sharp rebound off their current lows. In addition, I'll go "inside the numbers" in search of companies that have enhanced shareholder value in recent years by consistently buying back stock and paying solid dividends. And finally, I'll also feature our Income Portfolio in our "Portfolio Track" section. To view our publishing schedule for the remainder of the
year, please click here:
P.S. -- If you like the analysis above and you haven't signed up for a paid subscription to the StreetAuthority Market Advisor, then you'll need to subscribe soon to ensure continued delivery of this newsletter -- as well as all of our future Special Feature Issues -- throughout the rest of the year. The StreetAuthority Market Advisor retails for $199 per year, but if you act now you can take advantage of a special, limited-time discount offer of just $97 per year. Please CLICK HERE to subscribe today and lock in this special savings. We'll also send you two FREE in-depth research reports as a thank-you for your order! |
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