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PREVIOUS TULIPS OPINION

DoubleClick

KTel Intl      

 

DCLK (DOUBLECLICK): DCLK provides ad services for internet advertisers and web publishers. The stock, which went public in February, has benefited from the  mania for internet stocks in the U.S.A.  as anything remotely internet connected has been accorded stratospheric valuations. The shares rose from 41 to 76 this week after the company issued a press release touting a recent study that showed the DoubleClick network of websites to have the third largest online market share reach. This huge surge in price was largely due to a massive short squeeze that forced the shares up rapidly.  We expect this excessive rise to correct itself shortly. The optimism created by the shares rise is unwarranted. Several factors could drive these shares down over the coming months. Controversy erupted after competitor LinkExchange accused DCLK of overstating its percentage market share. Any continuation of this controversy could prove to be a drag on the stock price. This company trades on a bubble of investor optimism, not on fundamentals. We find the company's reliance on the AltaVista search engine for over 35% of their business as worrying. This reliance exposes the company to great risk. Revenues rose strongly in the latest quarter, but losses also rose as profit margins came under pressure. We expect profit margins in the online advertising business to continue to fall as competitive pressures rise. We also feel that it's only a matter of time before the giant traditional ad agencies muscle in on the smaller internet based ad agencies turf. The financial clout of the traditional advertisers will allow them to mount an all out war for ad dollars in the expanding internet marketplace. Trading at 18 times trailing sales,and with the endof the 6 month post-IPO lockup period looming, we expect DCLK to fall heavily when internet stocks begin to be valued on fundamentals rather than the word internet. We look for DCLK to give up all of the gains it made last week and would be sellers/shorters of the shares at these inflated levels.  (7/2/98)
 

 

KTel International(KTEL):With the dissemination of one press release in April, schlock music compilation purveyor KTel transformed itself overnight into an internet company in the eyes of investors. The stock jumped from 3 5/16 in April to a May high of 39 15/32.  Corporate insiders, sensing a good opportunity, sold shares en masse during the stock's rise and continued their selling as the stock fell back to below $10 a share.  Internet fever hit the shares again last week after the company announced a cobranded Playboy/KTel store.  The shares doubled again this week after the company announced that its KTel Express internet unit would be listed in the MSN Shopping Network.  The deal's were part of KTel's marketing strategy to, in its words, "leverage its proprietary music content, develop key strategic alliances with partners that also offer a well-recognized brand name, and to capitalize on its worldwide television expenditures to drive traffic to its site and gain market share."  We don't think it will work.  The company's widespread name recognition will be a negative factor in its ability to compete with larger, better financed, more successful music retailing rivals.  When the average consumer hears the name KTel she thinks of the company's endless stream of compilation albums.  The company must overcome the consumer perceptions that have been ingrained over the course of 20 plus years of telemarketing and selling compilations if it is to compete effectively as a mass market seller of a broad range of music.  This will require an infusion of cash to finance the necessary public image makeover marketing.  The company has yet to line up the necessary financing for this effort. The company noted in its latest SEC filing that, "the success of online marketing cannot be currently determined.   Achieving further participation in the market will require substantial additional financial resources.  Results will also be affected by current and future participants in the marketplace, many of whom have greater resources than the company."   Despite widespread hype about the internet's potential, the fact remains that there are still fewer computers than there are television sets.  So KTel is, in effect, refocusing its efforts on a smaller medium with narrower margins.   First quarter results show that revenues from the internet based KTel Express are still not significant 6 plus months after the site was established. By contrast, it took Amazon.com only 4 months to become the largest online music seller.  KTel's financial results from traditional selling venues over the years have been anything but a smashing success, and the early returns from its internet efforts to date show a continuation of its marginality, rather than a breaking of the trend.  This stock is overvalued at any price over $10 a share. Sell. (11/13/98)

  

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Last modified: April 16, 2001

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