Henry Blodget’s name is just as notorious in American households as it
is on Wall Street. We’re talking about an individual who has the power
to move Internet stocks and the broader markets with a gasp of breath or
the stroke of a pen. This has been true since his prophetic $400 Amazon.com (AMZN)
price call in 1998 while at CIBC Oppenheimer, which was surpassed in
only a few weeks. Since that time, Blodget has become the Senior
Internet Analyst at Merrill Lynch and a fighting bull behind such stocks
as America Online (AOL),
Infospace (INSP),
and Internet Capital Group
(ICGE).
Many industry insiders and investors are skeptical of Blodget’s
bullishness and mass impact on the markets. After all, it’s his job to
pump up and support the stocks for which Merrill Lynch does underwriting
work. However, Blodget is the first person to tell you that “all trees
will not grow to the sky.”
In fact, though Blodget has said, “We
continue to believe there is long-term upside for the leading Internet
stocks,” he also added, “we also continue to believe that the market is
transitioning into a more mature phase of growth and that this
transition, combined with a massive increase in competition across all
Internet sectors, will cause a shakeout and consolidation. Seventy-five
percent of the current crop of 400 or so public Internet companies will
never make money and will disappear within five years, either through
consolidation or failure.”
We had the opportunity to visit Henry in his New York City office for an
exclusive Reporter@Large interview.
Reporter@Large: So how are things going Henry?
Blodget: You know Luke, 100 miles a minute, but very exciting.
Reporter@Large: You recently came out with a pretty bullish
report along with Jessica Reif Cohen (Merrill’s Senior Media Analyst)
regarding the AOL-Time Warner merger. What is so attractive for
investors and why the jump in price after your report?
Blodget: Well, the stock had pulled back a lot. We think this is
a very powerful company that is now positioned to benefit from the
impact of the Internet on the media and communications industries over
the next ten years. Usually when you have earth shaking change like you
have now in all of these different sectors, a good way to invest around
it is to own the companies that are well positioned. What I mean by
that is that at this point in time, we think it’s beneficial for AOL and
Time Warner to own both sides of the converging Internet and media. If
you own both cable and the interface, you’re better positioned to drive
broadband cable. If you own the cable box, the subscriber, and the
interface, you’re better positioned to drive interactive television. If
you own both music content and the interface, you’re in a better
position to drive music downloading. We feel that if any companies can
make a merger like this work, these are the ones that can.
Reporter@Large: How big of a step was this for AOL’s cable pipe
mission (access to cable pipes)?
Blodget: AOL had already pieced together a pretty good broadband
solution on every other platform. It’s clear though, that cable is the
best platform. AOL was already accesses over cable on @Home and on Road
Runner as people get those services and then access AOL through them.
This will obviously make it a lot easier for people to get AOL over
cable. Ultimately, we believe people will be accessing the Internet
over multiple dev
ices and channels. It’s not going to be a single pipe.
Reporter@Large: A lot of rumors surrounded shares of Yahoo!
immediately after and still today with regard to a potential merger with
an offline media giant such as News Corp.
Blodget: I don’t think that the AOL-Time Warner merger makes it
more likely that Yahoo! will go out and buy a big media company.
Yahoo’s strategy has never been to own content; it’s been to partner for
third party content. They’re very good at this and it’s very clear now
that owning content isn’t much of a competitive advantage (i.e. Disney’s
Go Network has had serious problems with their content).
However, having News Corp as a close partner and equity stakes that go
both ways could be a tremendous advantage. News Corp. could help Yahoo!
solidify its dominant international growth and presence. News Corp. also
brings its satellite assets to the table. A partnership would make a
lot of sense but I don’t think you’ll see an acquisition.
Reporter@Large: With StarMedia (STRM),
are we really talking about a Spanish speaking Yahoo! (YHOO)?
Blodget: I think that is certainly the goal, to create a
pan-regional portal so you have both regional and local content in each
of the individual countries. The brand can cross all of Latin America
but still appeal to any user because of this localized focus. This is
important because of the different cultures and languages throughout
Latin America.
Reporter@Large: What about the competition?
Blodget: StarMedia has the advantage of being first to market.
Yahoo! and even AOL were very late to the game here. The market is very
small at this point but attractive in the long-term. And as we’ve seen
with Yahoo! and AOL over the last five years, if you grab an early lead
and don’t blow it, it’s tough to be dislodged. So the late comers now
entering this market are going to have to spend a lot more money than
StarMedia.
Reporter@Large: It sounds as though this could have the potential
to adversely affect Yahoo!’s business and stock.
Blodget: Well, Yahoo! doesn’t have to win in every portion of the
world to be very valuable. Yahoo! recognized Latin America as a small
market early on and chose not to target it. Now that it’s becoming a
larger market, it’s going to be harder for Yahoo to play catch-up, no
question about it. But Yahoo is very strong in Europe, Asia, and a host
of other countries. Time will tell how things in Latin America play
out, and it’s important to note Yahoo!’s brand and ability to use its
stock as currency to acquire. It’s certainly not game-over at this
point in time.
Reporter@Large: Are investors overlooking Yahoo!’s strength with
regard to its international operations?
Blodget: Yahoo!’s now getting 30 percent of their traffic from
International properties, but this only accounts for 10 percent of their
revenue. The next driver for Yahoo!’s stock will be when international
revenue growth really kicks in.
Reporter@Large: While we’re on the subject of growth drivers, any
thoughts on near-term catalysts for companies like Yahoo! as we enter
the spring and summer months?
Blodget: In general, the business-to-consumer (B2C) stocks have
moved from a phase of hyper-growth to just long-term growth. So these
are good stocks to own but they’re not the rocket ships they were three
years ago. In the near-term, Yahoo! should continue to be volatile. If
you’re a long-term shareholder though, we think it’s a great stock at
this level.
Reporter@Large: Another company you cover, Internet Capital
Group, has had a tremendous run but has fall
en fast in recent weeks
Blodget: Well, ICGE has had an incredible run. Remember, all of
the Internet stocks that have had similar runs, at some point, had
pretty significant pullbacks. The fundamentals there are still
extremely strong, B2B is very hot, and ICGE should do about 5-7 IPOs in
the next six months that will be big and will contribute a lot to net
asset value (NAV).
Reporter@Large: Aside from the overall downward spiral of Net
stocks, any other factors that have contributed to ICGE’s recent slide?
Blodget: You’re finally having the release of some of the shares
that were locked up prior to the IPO. Those are coming out and they
will continue to come out for the next couple of months. Not a big
deal, but that will clearly put some near-term pressure on the stock.
Reporter@Large: Because of its early entrance and portfolio
approach, is ICGE the Web company that will benefit the most from B2B
e-commerce?
Blodget: I don’t know whether it’s poised to benefit the most,
but if you’re going to hold an investment in one B2B stock, it’s a great
one to hold. It has exposure across the entire category so its not
dependent entirely on any one vertical or partner company. They’re
definitely positioned to capture a significant share of the total market
cap in B2B.
Reporter@Large: You guys recently initiated with positive
coverage of CMGI
Blodget: Yeah, CMGI is long the Internet in a major way. They
are in every sector of development (access, B2C, B2B, professional
services etc) and are now focusing heavily on International (Europe and
Asia). CMGI is in a great position to benefit as long as the Internet
grows and does well. If you’re trying to build a portfolio of stocks
that expose you to the growth of the Internet, this is a great one. In
addition, its Net Asset Value is not that unreasonable at all relative
to some of the other stocks on the market.
Reporter@Large: We’ve now experienced or are currently in midst
of the B2C, B2B, and wireless waves. Are there any emerging trends or
sectors that haven’t received recognition or are just beginning to gain
momentum?
Blodget: All the international markets are on fire with local
Internet companies. They’re experiencing the same kind of supply vs.
demand imbalance that we had here in recent years. Infrastructure still
has a way to go. Whether it’s wireless, hosting, or information
infrastructure that Infospace provides. This is a very hot sector.
Reporter@Large: Any thoughts on business-to-government (B2G)?
Blodget: It’s not a market that I spend time looking at, but
ultimately, it’s all just an acronym. Government is a big business. So
we’re talking about B2B.
Reporter@Large: For the short-term investors, what Net stocks
look attractive right now?
Blodget: If your goal is near-term appreciation, we would go with
companies like Infospace and Internet Capital Group. Priceline will
most likely have a great quarter and half. We also think that
Homestore.com has been beaten up too much and they’ve got a strong
story. These are companies that could do well over the next few months.
Reporter@Large: All right Henry, I’ll let you get back to work.
Thanks for sitting down with us.
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