Maybe Steve is working at II now . . .
Is Net2Phone Too Expensive or IDT Too Cheap?
iionline.com
By Dave Sterman, Director of Online Research (8/26/99)
Who says the IPO market is dead? Several recent IPOs have left the launch pad with a burst, and are now soaring through the stratosphere. Feels like the good old days of last spring when net-based IPOs became four baggers in a matter of days.
Today's white-hot special: Net2Phone (NASDAQ:NTOP - Quotes, News, Boards). The provider of technology that enables phone calls over the Internet, keeps climbing and climbing. After going public on July 29 at $15, the shares briefly popped to $30, then drifted back to around $20.
Until last Tuesday.
Since then, the stock has been on a tear, finishing up for seven straight trading sessions. In that time, the stock has run from $20 to $82.
The stock's recent rise is attributable to a few intriguing opportunities that the company has outlined for its technology. On Wednesday, Sprint (NYSE:FON - Quotes, News, Boards), announced plans to test Net2Phone's technology. This is a test. It is only a test.
The day before, Compaq (NYSE:CPQ - Quotes, News, Boards) agreed to incorporate Net2Phone's software on its Presario line of PCs. Earlier in the month, deals with NBC, and Cnet (NASDAQ:CNET - Quotes, News, Boards) also agreed to take an undisclosed equity stake in Net2Phone.
But it may be time to question whether Net2Phone, with a current market cap. of $4.3 billion is really worth it. The company is likely to generate negative cash flow until 2003, according to Deutsche Banc Alex. Brown's Michael Bowen. And even with the slew of recent deals, the company is only expected to generate $80 million in sales by the end of next year. That makes for a price-to-sales ratio of 54.
Trouble is, this is a business with virtually no barriers to entry. And long-distance telephony is historically a very low-margin business. If you look at the skimpy margins for long distance carriers when calls are $0.10 to $0.15 a minute, you wonder what kind of margins will be generated when Internet-based calls are $0.03 a minute.
This is not to say that shares of Net2Phone are on the cusp of crashing. On the contrary, this could well be one of the story stocks over the next year (until the above-cited financial realities eventually intrude). And since the company only raised $95 million in its recent IPO, it is sure to look to do a secondary stock offering within a year or two. As a result, Wall Street analysts will likely drool over the company's prospects in anticipation of some savory investment banking fees.
But if you like Net2Phone, you have to love IDT Corp. (NASDAQ:IDTC - Quotes, News, Boards), which still controls 57% of Net2Phone. At a recent $30.50, IDT is valued at $734 million. But IDT's stake in Net2Phone is worth $2.45 billion. I'll repeat that in case you missed it. $734 million IDT is sitting on a $2.45 billion asset.
IDT, for its part, has a nice little telecom business that has been steadily ramping up. And recent deals with Northpoint Communications (NASDAQ:NPNT - Quotes, News, Boards) and Spain's Telefonica de Espana (NYSE:TEF - Quotes, News, Boards) should help keep up the sizzle for some time to come.
Bottom Line:
Net2Phone may rise or fall in the weeks to come. But shares of IDT now look like a raging bargain.
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