On Thursday, we began the BreakerPort column with these words: "America Online. What does that name mean to you?" Today, we ask the following question: Excite@Home (Nasdaq: ATHM) -- what does this name mean to you?
If you're like most people, the brand "America Online" resonates with you much more clearly than does "Excite@Home." The moniker AOL makes many of us think of the blue AOL logo that has grown to represent easy online access. If you use AOL, you see the blue logo and you likely think "e-mail, instant messages, stock quotes, news," and more. Like a good trained dog, you want to click the blue logo and sign on.
So, it is clear to most people what AOL stands for, and I believe that this will remain true even after the merger with Time Warner. In contrast, Excite@Home is suffering an identity crisis -- if not with its patrons or within its own ranks, then at least with many investors or would-be investors. When the company was merely called @Home, it represented the leading pure-play in cable Internet access. It was a service company. Through AT&T (NYSE: T), the company offered cable Internet access.
Then, approximately one year ago, @Home announced that it would merge with Excite, a leading Internet portal. The merger made sense to me at the time, but since then, the company's image and direction has never taken shape in the public's mind the way that it should.
I believe that management wants Excite@Home to be viewed as the leading cable Internet provider and, with Excite, a pioneer in the effort to marry broadband content with broadband access. Also, in acquiring Excite, @Home positioned itself to capitalize on much larger streams regarding online advertisements and e-commerce. Both industries are expected to grow several-fold over broadband lines. The cost to the company was apparently high, however. Even though @Home has grown rapidly the past year and surpassed its goals (1 million subscribers and profitability before 2000), the stock has steadily declined since the merger.
I believe that much of the reason for the decline is a lack of investor confidence, or more accurately, a lack of knowledge regarding what the new company is trying to accomplish, or trying to "stand for." Another large factor in the stock's decline was news that AT&T will open its cable by 2002 to at least one competitor, ending Excite@Home's monopoly on this cable. But people seem to give that too much credence in the downfall. It isn't that surprising. Excite@Home's exclusive contract has always ended in 2002.
Plus, if Excite@Home had a stronger identity, the looming competition wouldn't merit such concern. The company has at least two more years to build its lead before it faces any competition. Very few companies have that luxury, and yet this stock isn't being rewarded for it! Obviously, the company needs to do a much better job in building its brand so that the eventual competition will be marginalized. If investors had more confidence in the brand, they might reward the stock now for having a two-year head start. Investors lack confidence because it is difficult to understand what the company is doing overall, and what the brand stands for.
If management knows what it is doing, then much of the problem is a public relations, or communications problem. It seems that many investors just don't know where this company is trying to go and how it's trying to get there. This weighs on the stock.
Consider: Excite was brought into the fold, but soon afterwards it was announced that Excite would be spun-off into a tracking stock. (That should happen this summer.) BlueMountain was bought, but, well, what of it so far? A plan to create "Work.com," a business portal, was recently announced, too, but how this plan fits into the company's overall strategy has not been well detailed.
Maybe these ventures will coagulate to form a strong, profitable, and diversified company, but so far, Excite@Home merely looks like an unfocused company. If it is focused on some overall goal, it hasn't communicated it to the public very well.
Some Valuation Metrics
Focused strategy or not, this company has assets that may be undervalued, and if management can simply begin to build the public's confidence, the value may be unlocked.
According to Media Metrix, Internet portals and their related properties had the following numbers of unique visitors from January 1 to January 31, 2000. (I threw in Amazon for fun and context.)
Unique Recent Co. Company Visitors Market Value Yahoo! 44,258,000 $94 billion Lycos 31,404,000 $8 billion Excite@Home 25,439,000 $11 billion Go Network 22,666,000 $4 billion Amazon 15,480,000 $23 billion About.com 13,160,000 $1.5 billion Go2Net 12,584,000 $2.9 billion
Now, divide each company's market value by its unique visitors and we get:
Market Value Company Per Unique Visitor Yahoo! $2,123 Lycos $254 Excite@Home $432 Go Network $176 Amazon $1,485 About.com $113 Go2Net $230
Among these portals, Excite@Home is third in traffic and second in "market value per visitor." However, it is the only company that offers cable online access. Excite@Home recently had 1.16 million subscribers that could somewhat conservatively be valued at $2,000 apiece. (Cable subscribers have been valued much higher in acquisitions.) This would mean that $2.3 billion (1.16 million subs x $2K each) of the company's total value is arguably supported by its cable business alone. Therefore, let's subtract $2.3 billion from the company's market value to see how Excite properties alone are being valued.
$11 billion minus $2.3 billion gives us $8.7 billion in total market cap. That number divided by 24.3 million unique visitors (we subtracted the 1.1 million @Home subscribers from Excite's traffic for good measure), gives us $358 in value per unique visitor. Looking at the table, this is still the second-highest value per visitor among the portals. If management can create more investor confidence, however, the stock could deserve a higher multiple, something just a little closer to Yahoo! Over long periods -- at least a decade -- each Excite visitor should be worth more than $358 to the company via ad and commerce fees.
(By the way, why do you think that Amazon's value per visitor is so comparatively high? Post your thoughts on the Amazon board.)
Where is Excite@Home Going?
I'm not sure where the company is going, however, a Fool close to it (named NicholasJG on the Fool message boards) shared his thoughts on where Excite@Home is headed and why its public relations department has been quiet. Read his thoughts in our March 8 Post of the Day.
For a conclusion to today's column, I was hoping to find a strong argument lurking behind Excite@Home's valuation -- meaning, I was hoping that the stock would look rather cheap on the simple yet meaningful valuation metrics that we considered. In the end, I instead see a moderate valuation argument. Meanwhile, I want to see the company better define itself to the public, despite Nicholas's argument linked above that says the company is waiting to do so for a reason.
Tomorrow's Radio Show
Matt Ridley, the author of the book Genome, will be on tomorrow's Fool Radio show to discuss biotech, genetics and his book. Catch it!
--Jeff Fischer, TMF Jeff on the boards.
Correction: On Thursday, when I rattled off some of Time Warner's properties, I included ESPN. Of course, Disney owns ESPN, and it has for many years already, along with ABC. I meant to write that Time Warner owns Sports Illustrated. I thought "sports," however, and my brain automatically wrote "ESPN" rather than SI. That's what a strong brand can do! (Or was it a rushed mind? Probably a combination.) The typo has been corrected in the column. Foolish apologies.