StarMedia's Shares Plunge on Analyst Downgrades

FORT LAUDERDALE, FLA. (03/13/2000) - The shares of Wall Street darling and Latin America Internet pioneer StarMedia Network Inc. fell sharply and lost 33.88 percent of their value today after two financial analysis firms downgraded the company's rating.

StarMedia, which closed at US$50 on Friday, ended today at $33.06.

Salomon Smith Barney Inc. downgraded the company from a "high-risk buy" rating to "high-risk neutral" and, later Merrill Lynch & Co. Inc. also downgraded the company, from a "buy" rating to "accumulate," in both instances because StarMedia is expected to have higher-than-expected operating costs, according to a Dow Jones News Service dispatch.

Salomon lowered its share price fair value estimate from $60 to $45, and increased its operating loss estimate to $169 million from $129 million, according to the report.

"We have increased our 2000 operating income loss estimate ... due to increased costs, particularly in marketing," the report reads.

Salomon revised its StarMedia estimates after the company told Salomon on Friday that it intended to spend an additional $12 million in marketing in the first half of the year. Salomon understands that increased competition in the online media market is forcing StarMedia to hike its marketing costs.

"Against that backdrop, we prefer to sit on the sidelines, watching StarMedia with a Neutral investment rating, through the current spate of industry-wide free-spending in Latin America," the report reads.

Salomon also says in its report that, per its estimates, StarMedia currently holds the largest market share of the Latin America online advertising market and that its portal business model can lead the company to success and profitability.

Salomon also noted in its report that it is concerned about the absence of an independent and established audience-measurement company, which forces advertisers to rely on data provided by the companies.

"While advertisers are using these data to allocate their budgets at present, we believe that the arrival of a credible third-party audience data source could reveal new competitive information and alter ad spending," which could reinforce or harm StarMedia's standing, the report reads.

Salomon in its report also revised upwards its StarMedia revenue estimates for 2001 by almost 20 percent, to $95 million. The financial analyst also increased its estimate of Latin America's online advertising market this year, from $120 million to $150 million.

StarMedia, led by its charismatic co-founder, Chairman and Chief Executive Officer Fernando Espuelas, was founded in 1996 and currently operates several Web portals and search engines, including its flagship StarMedia portal (http://www.starmedia.com/).

The company, based in New York City, is credited with igniting the high-pitched enthusiasm for Latin America's nascent Internet market. The company went public in May 1999 and has so far raised over $500 million in investment capital.

StarMedia has done a very good job of generating traffic for its Web sites, and it is one of the leaders in Latin America's Internet market, said Lucas Graves, a senior analyst at Jupiter Communications Inc. in New York.

"I don't think this hit will be the deciding factor over how StarMedia will do three years from now," he said. "The question isn't how its stock does today or this week, but how the company fits into the market it's playing on in the next 12 to 24 months."

StarMedia's challenge is to turn its visitors and its first-mover advantage and leadership into a revenue-generating strategy in the coming years, he added.

In general, because the market is still young, swings like this one are to be expected, Graves said.

"We've thought for a long time that the financial performance of Latin American Internet stocks will see a lot of ups and downs before the market grows into its true potential," he said.

The financial community's enthusiasm over Latin America's Internet market is warranted, considering that the region's growth in Internet use is the fastest in the world. but investors can't overlook the obstacles that affect this market, such as low PC and credit card penetration, he said.

"Real obstacles have to be overcome before Internet usage and online commerce can really thrive in Latin America," Graves said.

StarMedia posted a net loss of $90.7 million, or $1.36 per share, for fiscal year 1999, which ended Dec. 31, 1999, beating the expectations of analysts, which had predicted a loss of $1.74 per share for the year, according to a First Call/Thomson Financial poll. StarMedia's revenue for the year was $20.1 million, most generated from ad sales, compared with revenue of $5.8 million in fiscal 1998.

There were 10.6 million Internet users and $194 million in business-to-consumer online sales in Latin America in 1999, with figures expected to rise to 66.6 million users and $8.3 billion in online sales in 2005, according to Jupiter.

StarMedia, in New York City, can be reached at http://www.starmedia.com/.

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