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 02, 2000
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