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The dot-com bubble is behind us, and now a few Internet stocks even rate a strong buy. That's the word from Scott Kessler, Standard & Poor's analyst of Net stocks. He particularly likes DoubleClick, Citrix Systems, and Intuit.
Kessler is bullish on the online-advertising market, which he thinks has bottomed out. He commends DoubleClick's strategy in this area and sees the company as a superior value. Citrix, he says, is one of the few software outfits with double-digit growth, and he likes Intuit for its position in personal-finance software and for its cutting of expenses.
On the next level below buy, Kessler and S&P rank AOL Time Warner as an accumulate -- a "very attractive value right now," he says, notwithstanding the fact that the economic downturn hit it harder than it expected and that it is as a complex company suffering in some ways from the Enron cloud (see BW Online Special Report, "AOL Time Warner -- One Year After").
These were among the points Kessler made in a Feb. 5 investing chat presented by BusinessWeek Online and Standard & Poor's on America Online. He was replying to questions from the audience and from Jack Dierdorff of BW Online. Edited excerpts from this chat follow. A full transcript is available from BusinessWeek Online on AOL at keyword: BW Talk.
Q: Scott, what do you think of this nervous market, overall? Will it recover from this bad case of Enron nerves?
A: There's no question that the market at this point is trading off emotion more than anything else. We actually believe that the fundamental underpinnings of the U.S. economy are improving, and that portends well for the broader market. The issues related to Enron are significant -- and may lead to broader action. However, we really don't think that a change in our outlook is warranted by what, at this point, we perceive as something along the lines of a "bad accounting" witch hunt.
Q: And how about the Internet companies generally? How is the group doing?
A: From a fundamental perspective, several companies put up better-than-expected December quarters, particularly with respect to pro-forma earnings per share. Companies that did particularly well, and ones that I happen to cover, include Amazon.com (AMZN
), DoubleClick (DCLK
), Expedia (EXPE
), FileNET (FILE
), and Yahoo! (YHOO
). Amazon is 3-STARS [in Standard & Poor's Stock Appreciation Ranking System], or a hold. DoubleClick is 5-STARS, buy. Expedia, FileNET, and Yahoo are 3-STARS.
Q: What is it about DoubleClick that makes it a buy while the other stocks you mentioned, such as AMZN and YHOO, are only holds?
A: That's a great question. The difference, say, between an Amazon, a Yahoo, and DoubleClick are as follows: Amazon is a company whose growth from a top-line perspective is maturing. I'm not the biggest fan of the online-retail model. On the other hand, I'm very enthusiastic about the online-advertising market.
My impression is that this particular area has bottomed, and over the past year, DoubleClick has made a number of shrewd strategic acquisitions to enhance its position in a number of segments in this market. Ultimately, when comparing DoubleClick and Yahoo, I look at the fact that DoubleClick is simply a better value -- a better value on growth, p-e, and intrinsic value bases. Importantly, DoubleClick has made great progress in the infrastructure area of online advertising and has an extremely healthy balance sheet. Those are two compelling attributes of the company (see BW e.biz, 2/18/02, "DoubleClick, Take Two").
Q: Any 5-STAR recommendations besides DoubleClick?
A: Yes, I've got two others. Both are software companies that have made major inroads using the Internet for distribution and functionality. [One is] Citrix Systems (CTXS
), which specializes in client/server software and technology. Of late, Citrix has been benefiting from an increased demand in remote-computing solutions. As one of the few companies in the software sector that's going to post double-digit revenue growth in 2002, Citrix is both a growth story and an attractive value at approximately 19 times my 2002 EPS estimate.
My second buy-rated stock is a name that's probably more familiar to you: Intuit (INTU
). Intuit is the leading purveyor of personal finance, accounting and tax software for individuals and small and medium-size businesses. Intuit is being run by a former GE executive, who is bringing that company's emphasis on efficient processes to Intuit.
We believe that margin expansion is going to continue for some time. In addition, with tax season upon us, Intuit not only generates more than half of its revenues from tax-related businesses but also has shown an ability, of late, to both increase market share and raise prices. The stock has shown impressive resilience amid the recent tech downturn, and trades at an attractive p-e/growth ratio.
Q: Some more specifics about Amazon?
A: I continue to have mixed feelings about shares of Amazon. On one hand, I don't think that anyone can reasonably say that the company posted anything but an outstanding fourth quarter. The revenue growth, particularly in the core books/music and video segments, as well as the notable controls on operating expenses, resulted in pro-forma EPS [earnings-per-share] substantially better than not only Street estimates but also the highest of those particular forecasts.
On the other hand, now that the company has earnings, it is measured from a valuation perspective on a p-e basis, which according to my estimates indicates that the stock is still fully valued at current levels. Overall, the company is making great strides, but these appear to already be reflected in the stock price.
Q: What do you think of VIGN
(Vignette)?
A: We don't cover Vignette here at S&P. However, we do cover companies that consider themselves competitors to Vignette. We maintain hold recommendations on both BroadVision (BVSN
) and Interwoven (IWOV
). We are enthusiastic about the prospects of the Web content-management segment, which should attract notable spending as compared with other sectors of the Internet economy.
Q: Here's a pessimist: Nasdaq 900 by May?
A: I think that 900 is an extremely pessimistic view at this point.... My impression is that once we emerge from this economic downturn, which might occur within the next few months, it's likely that Internet stocks, technology stocks in general, and thus the Nasdaq will appreciate notably.
Q: Any thoughts on Internet Capital Group (ICGE
)?
A: It's amazing that almost every time I do one of these chats, I'm asked either about Internet Capital Group or CMGI. That said, I still cover neither of these stocks. It's fair to say that, at this point, the incubator model has failed. And the best thing going for CMGI right now is its current affiliation with the Super Bowl champions, the Patriots. Seriously, though, I think that the business model of ICGE is questionable. You might be better suited putting your money elsewhere.
Q: Here's one about the giant in the room: How about AOL
(AOL Time Warner)?
A: Currently, I have an accumulate (4-STARS) recommendation on AOL. AOL has suffered over the past few months as a result of its inability to meet overly aggressive guidance put out by the company well before the economic downturn manifested itself. It's my impression that the company believed that its substantial subscriber base and unparalleled stable of properties could help it overcome a more challenging economic backdrop.
Unfortunately, AOL was affected by the problems in the economy more than company executives might have initially expected. In addition, it recently announced that it was buying back full ownership of AOL Europe, which hit the company's capital structure somewhat. And lastly, I think that AOL is unfairly being punished along with many publicly traded companies that have complex financial disclosures, in the wake of the Enron debacle and the downturn of other companies with many "moving parts." I still like the company and believe that it's a very attractive value right now.
Q: Are there any avoid or sell names in your coverage area, Scott?
A: Yes, there are. The one company I'd like to highlight here is Macromedia (MACR
). This is a company that makes great products and has a very loyal user base. However, unfortunately, great products and loyal customers often do not necessarily translate into a great company and a great stock to own. Macromedia acquired a company called Allaire last year, and pretty much since that point Macromedia has been struggling mightily to recapture some of the glory it experienced several years ago.... Ultimately, this is a stock that has additional downside because demand hasn't resumed, the expenses are too high, and annual earnings per share aren't expected until fiscal year '03, which ends in March.
Another company I've had an avoid recommendation on for some time is Fiserv (FISV
). Fiserv provides data processing services to banks, thrifts, and other financial institutions. I believe this stock is simply overvalued, especially as compared to its peers.
Q: Over into the field of Internet domain names, your thoughts on RCOM
(Register.com)?
A: Well, unfortunately, I don't cover Register.com. However, I do cover one of its primary competitors, VeriSign (VRSN
). VeriSign actually had a decent fourth quarter, but the company continues to be dogged by questions regarding a continued slowdown of growth in its domain-name business. Nonetheless, the company recently asserted that it was gaining market share against its primary competitors in this area, including Register.com. I don't follow Register.com, but my guess is that selling into a marketplace with deteriorating fundamentals and market-share losses doesn't bode well for the company.
Q: To what extent are your buy and accumulate stocks picked because they could be bargains at current prices, in advance of the upturn you predict?
A: The way that I go about picking stocks involves kind of a four-step process: 1) fundamentals, 2) valuation, 3) upcoming catalysts, and 4) technical analysis. Valuation definitely plays an important role, and I always try to be opportunistic when I believe that a stock has sold off excessively. To directly respond to your question, we are encouraged to look more closely at names that have sold off significantly because they offer greater value.
Q: Can you give us your definition of an "Internet" stock?
A: Well, that's a question I get a lot. Generally speaking, the way I evaluate whether a company is a dot-com is a) whether the company would be able to exist without the Internet, and b) whether the company generates a majority of its revenues through the Internet, or as a result of its existence. It's fair to say that I cover a wide array of stocks, many of which aren't considered traditional Internet companies. However, most of the companies I cover have a notable reliance on the Web for, say, distribution or growth in the future.
Edited by Jack Dierdorff
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