S&P's top Internet stock pick is Audible.com (ADBL)

Jun.28.05 | About: Audible, Inc. (ADBL)

Audible.com (ticker: ADBL) was S&P's "stock of the week" last week. Here's an extended extract from analyst Scott Kessler's note (with permission):


STRONG GROWTH STORY INTACT
RECOMMENDATION:  Strong Buy

Highlights 

  • We have a favorable view of Audible, Inc., a leader in digitally delivered spoken-word audio content, as it continues to benefit from strong secular growth trends associated  with the adoption of, and demand for, digital audio technology. We believe Audible’s market opportunity is substantial.   
  • We think the company’s competitive advantages include its patented technology, substantial content, extensive distribution, widespread device compatibility and  singular focus on the spoken-word audio segment. 
  • Based on our discounted cash flow (DCF) analysis, our 12-month target price is $25.  As such, we expect notable capital appreciation and the outperformance of the S&P 500 over the next 12 months.
  • Risks to our opinion and target price include a change in the company’s relationship  with Apple Computer and its iTunes Music Store, greater competition than we expect  in the market for spoken-word audio, more appreciable churn rates than we foresee, higher costs than we forecast for content and customer acquisitions, and less success  than we anticipate with new initiatives.

INVESTMENT THESIS

This week’s Focus Stock of the Week is Audible, Inc. (ADBL), which carries Standard & Poor’s  highest investment recommendation of Five STARS, or Strong Buy. Audible is the world’s leading provider of digitally delivered spoken-word audio content. The  company, in our opinion, has been benefiting from the widespread and growing deployment of  portable audio devices and associated strong demand for digital audio content.

MARKET OPPORTUNITY

In December 2004, the Audio Publishers Association estimated the size of the audiobook market  at $800 million. Based on Audible’s 2004 net revenues of $34.4 million, the company had  captured a mere 1.3% of this segment. However, we think Audible’s market opportunity is  considerably larger than audiobooks.   

According to IDC, worldwide shipments of portable audio players are expected to more than  triple, from 32.8 million in 2003 to 116.1 million in 2008. In our opinion, this significant user base  and projected growth offer substantial opportunity for Audible, given that 56.1 million audio  devices were shipped last year, and the company had only 467,000 customers from 1997 through  2004. More than 135 kinds of devices are compatible with Audible’s technology.   

The company has also been readying Audible Wireless, which will enable its content to be  downloaded and accessed via wireless phones. And, earlier in June, Audible announced an  exclusive partnership with XM Satellite Radio, which we believe will eventually enable the  company to pursue what we consider to be the very lucrative automotive audio market.    

Given the notable current and anticipated deployments of Audible-compatible devices as well as  substantial access to, and demand for, digital content, Audible sees its market opportunity as  consisting of everything from audiobooks to talk radio, business information, publishing,  magazines and newspapers, education and related materials, and potentially in excess of $100  billion.   

In addition, over the past 12 months, the company has launched offerings in France, Germany, and  the U.K.   

COMPETITIVE FACTORS 

We believe there are several competitive factors that will enable Audible to maintain and grow its  share of the spoken-word audio market.   

The company has significant technology advantages, in our view. Audible has been providing and  improving its spoken-word audio offerings since 1997. It pioneered the segment, and delivers  appealing user functionality, much of which is supported by proprietary intellectual property. For  example, the company’s patents enable customers to skip between selections, individual articles,  and chapters within selections. Customers can also pause and resume listening where they left off,  and can “bookmark