Info: Can Online Stocks Only Go Up?
washingtonpost.com
Many Are Trading Near Lows, but
Experts Don't Agree on Prospects
By Victoria Shannon Washington Post Staff Writer
Sunday, March 9 1997; Page H02
The Washington Post
NEW YORK
So you're an online junkie who believes the Internet is the future.
Are you willing to put your money where your mouth is?
If so, now may be time to take a new look at shares in companies
that sell access to the Internet. Many are trading near their lows,
and some analysts see that as a buying opportunity. Of course,
others say those low prices are a reflection of their true value --
and that's just the kind of clash in views that makes markets
interesting.
Like any technology sector, Internet access stocks carry a higher
degree of risk than most mature companies. But when big
investment names such as George Soros, who led a group that
bought 15 percent of EarthLink Network Inc. in January, are eager
to take a flier on them, it makes some people sit up and pay
attention.
There are lots of ways for individual investors to own a piece of the
Internet -- through software companies, hardware firms, creators
of content or purveyors of services (or through Microsoft, which
does business in all of these areas). But investing in the "pipeline"
field -- the companies that connect you -- is buying the Internet at
its most basic.
Most estimates put the number of people with online accounts at
15 million to 20 million, and most predict that will double within a
few years, according to many people at last week's Consumer
Online Services conference here, sponsored by Jupiter
Communications Corp. But the stocks of access companies have
been struggling lately for two main reasons, analysts say:
overoptimism about them a year ago, and greater uncertainty about
their eventual money-making potential.
Many of the companies with the highest number of Internet
subscribers are publicly traded (with the exception of Prodigy
Services Co.). Analysts differentiate among them in two ways:
There are those that seek primarily consumer business, such as
MindSpring Enterprises Inc., America Online Inc. and AT&T
Corp.'s WorldNet Service, and those that go after corporate
accounts, such as Digex Inc. in Beltsville, BBN Corp., PSINet Inc.
in Herndon and WorldCom Inc.'s UUNet Technologies Inc.
subsidiary in Fairfax.
Another distinction is which ones actually own and run the "pipes"
-- the network carrying the signals. Surprisingly to many people,
AT&T does not -- it leases space from others. MCI
Communications Corp. and Sprint Corp. are two of the major
"backbone" owners and operators. UUNet is another.
Unexpectedly, America Online of Dulles is too, through its ANS
subsidiary.
Of course, few if any are yet making money on their access
business.
"Profitability is coming into view," said Ulric Weil, technology
analyst at the investment firm Friedman, Billings, Ramsey & Co. in
Arlington. "I see it for PSI in early to mid-1998 and the fourth
quarter of this year for Digex."
On the consumer side, access has become a "commodity," several
experts here said, with a standard price of around $20 a month.
Thousands of companies offer consumer Internet access. The
turnover rate in consumer accounts can be as high as 40 percent to
50 percent, while among corporate accounts, this "churn" is about
3 percent. The only area still ripe for a market is in specialized
services, some say.
"We think that [consumer] business is unstable because the pricing
is unstable," said Weil, whose firm underwrote the initial stock
offering of Digex.
"The business of providing access alone is a bankrupt business,"
said Randy Befumo, an analyst with the Motley Fool online
investment service in Alexandria. "For somebody to really make
money, they've got to own part of the backbone, and they've got to
have a robust economic model -- in other words, look for
companies that can make money on more than access," such as
advertising, commerce and partnerships.
"If consumer online services can shift to completely
advertising-driven, like TV broadcasting, they can succeed,"
Befumo said. "The question is, (a) can that be done, and (b) who
can do it?"
Most mature markets settle on three big names. Befumo's advice:
Pick the one you think will be one of those three when the dust
settles. "These are good long-term investments," Weil said.
Steve Harmon, senior investment analyst with Mecklermedia's
Iworld on the World Wide Web, isn't a big fan of the access stocks; he's more excited about security software companies, such
as Trusted Information Systems Inc. in Glenwood, Md. "I honestly
don't think they're bargains now," he said. "Wall Street has had a lot of time to look at them. A lot of them are in transition -- it's a rocky period."
He's also not keen on AOL, whose stock plummeted from more
than $70 a share a year ago to about $22 in the fall before
rebounding to $42 Friday.
"I haven't been impressed with their ability to manage their
connections," Harmon said, alluding to the access crisis AOL faced
when it started offering unlimited connections for a fixed monthly
fee last year. "I'd rather have 4 million happy customers than 8
million angry ones."
Since earnings are nonexistent, the key financial figures these
analysts recommend comparing among the companies are revenue
per subscriber, cash flow and working capital. "Do your
homework," Harmon said. "Get the analysts' reports from the
brokerages, and compare where they're in common and where
they diverge."
A year ago, Befumo said, "people complained that all these stocks
were overpriced. Now that all these bargains are appearing,
nobody's buying."
@CAPTION: A BUMPY RIDE (This graphic was not available)
c Copyright 1997 The Washington Post Company
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