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It’s Time for Dot-Com Bottom-Fishing


By Hal Plotkin
Silicon Valley Correspondent

Analysts say that the recent Internet stock selloff gave a haircut to several dot-com stocks that now look quite attractive.

Although the stocks of second-tier, cut-rate online retailers who deliver bulky products, such as groceries or pet food, are unlikely to bounce back anytime soon, several other recently beaten-down stocks in niche markets, such as online travel and auto sales, will likely eventually roar back, analysts say.

“The correction made sense for a lot of stocks,” says Mark Rowan, an analyst at Prudential Securities, based in New York. “But on others, it was clearly overdone.”

Rowan cites online-travel companies Expedia Inc. {EXPE} and Travelocity.com Inc. {TVLY} as prime examples. Both stocks got hammered in recent weeks, despite what the analyst says are good fundamentals and improving market conditions.


Expedia Post-IPO Chart


Travelocity.com Post-IPO Chart

Rowan says that the two leading online-travel stocks suffered steep price declines, despite the fact that they face considerably fewer obstacles than most other dot-com retailers. The anticipated consolidation in the online-retailing sector that is spooking many investors, for example, has already taken place in the online-travel sector, which also benefits from the ability to quickly and inexpensively deliver its products to online buyers.

Rowan says electronic tickets, for example, are already changing the value chain in the travel industry.

“If you can digitize a product and get it to the consumer, you take a lot of waste out of the system and create some significant savings,” Rowan says.

Earlier this week, Rowan reiterated “strong buy” recommendations on both Expedia and Travelocity.com, both of which he says have been unreasonably battered.

Rowan has 12-month price targets of 40 on Expedia and 60 on Travelocity.com.

“It’s a little hard to have faith in price targets in this market,” Rowan says. “But the point is these are examples of companies that are using technology to replace manual labor. That should make them long-term winners.”

Steve Weinstein, an analyst at Pacific Crest Securities, based in Portland, Ore., agrees, but he gives the slight edge to Travelocity.com. He rates Expedia “buy” and Travelocity.com “strong buy.”

“Travelocity is the largest, the leader,” Weinstein says, “but we think both of them are well-positioned in a great business.”

Weinstein says that the travel business has rich information content that makes it ideal for the Internet, a strength that will only increase as available bandwidth grows. Future applications, for example, include the transmission of videos from vacation and hotel sites and increased availability of end-destination services, such as booking scuba lessons, local tours or making restaurant reservations, along with more basic travel arrangements.

“There are no physical fulfillment costs,” Weinstein says. “It’s a very powerful platform.”

In the offline world, about 80 percent of all airline tickets are purchased from travel agencies, with the remaining 20 percent purchased directly from airlines. Online, that figure has been closer to 50-50, Rowan says.

“The first people online were the frequent flyers,” Rowan says. “As more people come online, though, they’re going to want to shop for the best fares and values.”

While a complicating factor — the ongoing lawsuit between Expedia and priceline.com Inc. {PCLN} over rights to the “name your own price” system of purchasing tickets — is expected to have only a marginal impact on the overall online travel industry, analysts say, due to the more limited appeal of that approach. Most travelers, they say, prefer to specify exactly where and when they want to travel, rather than adjust those plans for what is often just a slightly lower price.

On Jan. 31, Expedia posted a loss of $23.1 million on revenue of $17.8 million for the fiscal second quarter ended Dec. 31, as compared with a loss of $5.4 million on revenue of $7.8 million for the same period a year earlier. The company, a Microsoft Corp. {MSFT} spinoff, has cash and marketable securities totaling $74.1 million on hand, according to its most-recent quarterly statement.

On Feb. 23, Travelocity reported a pro forma loss of $11.4 million on revenue of $30.2 million for the fourth quarter of 1999, as compared with a pro forma loss of $11.3 million on revenue of $11.7 million for the same period a year earlier. The pro forma results reflect Travelocity’s recent acquisition of Preview Travel Inc. The combined companies have cash and marketable securities totaling $13.9 million on hand, according to the firm’s most-recent quarterly statement.

Analysts say investors looking for gems among the Internet sector’s recent wreckage should also take a look at online auto sales leader Autobytel.com, Inc. {ABTL}, which they say likewise has the elements that make it attractive at its current price.

Like the online-travel firms, Autobytel.com sells something it can deliver online, in this case, information about cars, along with sales leads for the more than 4,800 dealers that have already joined the company’s network.

“Clearly, Autobytel’s stock has been punished for no good reason,” says Jital Patel, an analyst with Deutsche Banc Alex. Brown, based in San Francisco.


Autobytel.com 52-Week Stock Chart

“Autobytel got caught up in the dot-com downdraft,” Patel says. “But business is very strong. They have an exclusive deal with each of their more than 4,800 dealers and they are in a business, lead generation, that has 100 percent gross margins. It’s a highly defensible, high-margin business model, and the eighth most-recognized brand name on the Internet. The stock is clearly highly undervalued.”

Patel says Autobytel is the clear online leader, owning about 50 percent of the online market share in an industry that generates more than $120 billion a year, a number that includes both online and offline dealer sales. “They’re in a very strong position to grow,” he says. “They have substantial upside potential.”

It is a sentiment shared by Jonathan Gaw, research manager for consumer e-commerce at International Data Corp., based in San Jose, Calif.

Gaw says Autobytel.com is on the top of his list of online retailers who are likely to prosper over the next five years.

“They have momentum, a customer base and the arrangements they have with dealers creates significant barriers to entry for competitors,” Gaw says.

On Jan. 27, Autobytel.com posted a loss of $4.9 million on revenue of $12.4 million for the fourth quarter of 1999, as compared with a loss of $3.9 million on revenue of $7.3 million for the same period a year earlier. The company has cash and marketable securities totaling $85.5 million on hand, according to its more-recent quarterly statement.

David Cooperstein, an analyst at Forrester Research, based in Cambridge, Mass., says the dot-com selloff is good news for the more-select group of online companies that are able to withstand more-rigorous investor scrutiny.

Cooperstein knows a little something about the dot-com selloff.

It was his highly negative report, published last week, that helped touch off the online retailing sector’s steepest decline yet.

“The best thing about what is happening in the market right now is the companies that survive the coming weeks and months will have a sustainable business model,” Cooperstein says. “We’re about to weed out all the ‘me-too’ players.”

That process, however, will leave at least some survivors standing, and to those victors will go the spoils.

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