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If you believe that in a few years our leisure time will be spent either surfing, shopping, or chatting on interactive, Web-enabled television sets and reading novels, newspapers, or magazines on electronic books, then Gemstar International Group (GMST) is the stock for you. That's the vision of the company's chief executive, Henry Yuen, who says Gemstar has the technology to make both watching TV and reading -- the top two leisure-time activities -- more interactive and more fun. So, for example, viewers of a beauty pageant could vote on the winner or electronic readers could enjoy a backlit screen or shopping from an interactive catalog. "What we like to do is enhance that experience," Yuen says.
Yuen has a long way to go until his vision becomes reality -- if it ever does. Clearly, there are risks in owning this stock now. Gemstar, based in Pasadena, Calif., gets about 45% of its revenue (out of a total $225 million expected for fiscal year 2000 ended in March) from its slow-growth VCR Plus+ business, which lets at-home viewers videotape TV shows by entering a code printed in television listings. But the rest of its revenue -- and where analysts think the bulk of its future revenue growth lies -- is its high-tech electronic program guide (EPG). A kind of gateway to programs and services delivered via TV, the EPG incorporates two-way paging technology, among other things, that allows users to "channel-surf on steroids," says John Corcoran, CIBC Oppenheimer's analyst for broadband and new-media companies.
In many instances, Gemstar collects fees and sells advertising for licensing the technology to TV networks, cable networks, and others. Gemstar's planned acquisition of TV Guide (TVGIA) is expected to jump-start that part of its business because TV Guide has the brand name and massive subscriber base that can build on EPG's technical capabilities (which Gemstar has patented). Only problem there is that Gemstar is waiting for Justice Dept. approval of the merger. Analysts predict the merger will go through by early June. The big question is timing. When the deal closes, the merged company will be renamed TV Guide International, reflecting the strength of that brand.
TOP TIER.
Gemstar's third business is the more nascent digital publishing. In January, Gemstar bought the two leading electronic-book companies, NuvoMedia, maker of the Rocket eBook, and SoftBook Press, maker of the SoftBook Reader. There will be lots of competition for this emerging market. On May 23, Microsoft Corp. announced a new deal for its Windows Reader software with Time Warner publishing. Yuen says the goal now is "to get the electronic reading habit endorsed, validated, and engrained" and said he "applauds" Microsoft's announcement.
The company's futuristic view of electronic leisure makes Gemstar one volatile stock. When tech stocks got slammed this spring, Gemstar took it doubly hard, since the crash coincided with rumors that its planned acquisition of TV Guide was foundering. The stock, which traded up from a 52-week low of $25 in October, 1999, to a high of $107 in mid-March, fell into the low $40s in April and remained there. It closed on May 23 at $39, a 6 1/2 point, or 14%, drop due to Microsoft's announcement and another weak day for tech stocks.
"This stock won't get anywhere near a full rebound until the TV Guide deal closes and we get some nice stability in the tech sector, which clearly we don't have," says Corcoran, who maintains a $108 price target and a strong buy rating on the stock. Still, analysts want to get a look at the company's fourth-quarter earnings, which Yuen says the company ideally wants to release after the close of the merger. The company has promised to report the earnings the first week of June if the deal isn't done by then.
Robertson Stephens analyst Michael Graham notes in a May 4 report that he is "slightly cautious" about the fourth-quarter results because it is unclear how the company will account for licensing payments, which could make some estimates look high (he calls for $73 million in the quarter). Despite these near-term concerns, there are few stocks Wall Street is more bullish on long term. First Call Corp, which tracks analysts' recommendations on 6,000 stocks, says Gemstar is in the top 1% of companies rated. Analysts believe it will boost earnings an average of 35% a year for the next five years. The consensus calls for 2000 earnings of 45 cents a share and 2001 earnings of 54 cents.
LOTS OF ACTION.
Most analysts don't even factor the electronic-book business into their projections since it is so new. However, Deutsche Bank Alex. Brown analyst Lawrence F. Marcus stated in an Apr. 12 note that after seeing a prototype for the next-generation eBook, he is "increasingly bullish" on that opportunity. But Marcus cites it as just one of "many potential catalysts" coming up for Gemstar, including more advertisers on the program guide, the imminent launch of AOL-TV, and the spread of Microsoft's WebTV, which also licenses Gemstar's guide. (In the AOL-TV deal, Gemstar gets an estimated $5 to $8 in recurring revenue each year per subscriber, says CIBC Oppenheimer's Corcoran.)
"It is an incredibly high-quality company with fat margins, very savvy management, and an outstanding business model," says Corcoran. Graham rates it a strong buy in a May 4 report, writing that "the rewards far outweigh the risks." Although investors may not be willing to pay up for expectations of future growth in the current market, "we believe that this is one of the first stocks that will recover when that atmosphere changes," he wrote.
Even if you agree with Yuen's vision for electronic leisure and analysts' projections for how wealthy that could make Gemstar shareholders, keep in mind that this is a scary time to buy. There are valid concerns about the pending merger and upcoming quarterly results, not to mention a sliding market for tech stocks. But when investor appetite for plays on the future of technology returns, it could be well worth following Gemstar to see if Yuen's vision remains on track.
Copyright 2000 , by The McGraw-Hill Companies Inc. All rights reserved.
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