BlueMountain eCard to @Home: Get Well Soon

Although the market has expressed its doubts about Excite@Home, if the cable ISP can survive to profitability, the stock will rise in value. Making the right diagnosis is not easy in this case.

To see the numbers on which this analysis is based, choose between the MS Excel version and the HTML version.

by Manish Aurora
of rationalinvesting.com
[December 29, 2000]

Excite@Home (NASDAQ: ATHM) is a provider of broadband internet services over the cable television infrastructure and leased lines to consumers and businesses. ATHM reported third quarter 2000 revenues of $169.9 million, an increase of 51% compared to revenues of $112.6 million in the third quarter of 1999. Sales increased 8% from $157.6 million in the second quarter of 2000. The Excite Network reached 27 million unique visitors, or 35% of U.S. web users according to Media Metrix, making it the fifth-most widely visited Internet network in the U.S.

Growth is real
In the third quarter Excite@Home's residential subscriber base grew to 2.3 million, up 28% from approximately 1.8 million on June 30, 2000. Excite@Home's international operations include joint ventures in @Home Japan, @Home Australia and @Home Benelux, as well as fourteen local versions of Excite outside the U.S. Global penetration was 6.6% of the 35 million upgraded homes at September 30.

Excite@Home Business Solutions, the company's commercial division, had 8,950 total accounts activated as of September 30, 2000, up 18% from the second quarter. Excite pulled out of Chello, a European joint venture earlier this quarter.

Excite's BlueMountain.com maintains its lead in online greetings, with 69 million electronic cards sent during the latest quarter. New services introduced include: Blue Mountain Invites, video attachments, and Print Center, a partnership with Hewlett-Packard which allows users to print on stickers, wrapping paper, t-shirts, etc., using Blue Mountain graphics. For merchants, Blue Mountain has introduced gift and offer attachments, enabling senders of electronic cards to attach gift certificates or coupons.

Excite@Home announced plans to acquire Pogo.com, an online family games network. Excite@Home intends to use Pogo.com technology to create next-generation broadband interactive entertainment.

In August, Excite@Home extended distribution relationships with AT&T, Cox and Comcast. In a modification of control, AT&T now owns 25% of the value but 74% of the voting power of Excite@Home's equity. AT&T has agreed to distribute @Home services through 2008, and Cox and Comcast have agreed to do so through 2006.

The diagnosis is not perfectly clear
Excite@Home expects its subscriber base to grow in the fourth quarter by 25% to 30%. It anticipates revenue growth at a somewhat lower double-digit rate. It has $333 million in cash, and hence it has no survival issues. It has all the ingredients necessary to be a top-tier ISP, since DSL's performance is not as good as that of cable modems, and does not offer the content @Home does. Additionally, DSL rollout has run into the kind of hiccups @Home faced earlier in the year. Our model values ATHM at $19 (current market price: $5) using a Beta of 1.5 and terminal growth of 6.1% to take into account the long-term value of Blue Mountain Arts. We believe the stock has suffered as investors sell their losers at year-end to avoid taxes.

The risk of a firm is determined by its present financial condition including current cash flow. For ATHM, cash flow should become positive in the near future. Once that occurs, the perceived risk of @Home not being able to survive should go away, and hence the discount rate applied to ATHM's cash flow should decline. This raises its present value. It is a barrier the firm crosses, so the change is instantaneous, not gradual, and the stock price can jump on such news.

Important notes
The methods on which this report is based are described in "Pricing A Stock."

Please also read the disclaimer.

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