NextCard Bucks the Trend Of Web, Credit-Card Stocks
By PETER EDMONSTON
THE WALL STREET JOURNAL ONLINE
It's been a tough year for credit-card company stocks. And for Internet stocks, it's been downright dismal. A double whammy for online credit-card issuer NextCard?
Wrong.
Defying the trend among card issuers and Internet companies, NextCard's stock is up more than 12% for the year. This is a remarkable contrast to declines for American Express, MBNA, Providian Financial and Capital One Financial, four of the biggest players in the credit-card business.
So why has NextCard's stock bucked the trend?
Wall Street, for one, seems impressed with the San Francisco company's performance in the online credit-card arena after five years in operation. With about one million accounts, NextCard is dwarfed by the traditional credit-card companies, but it is king on the Internet.
Indeed, NextCard was recently ranked the leading issuer of credit cards on the Internet by Brittain Associates, an Atlanta-based research firm. It has a 26% share of the Internet market compared to 2% for MBNA, the nation's No. 2 card issuer, and 18% for Capital One, its nearest rival online.
And with about 4.7 million visitors during the week ended July 1, NextCard's Web site (www.nextcard.com) was ranked the most highly visited "Business/Finance" site by Internet measurement firm Jupiter Media Metrix, beating out No. 2-ranked AmericanExpress.com.
Although NextCard has yet to turn a profit, supporters see both potential and a bargain in the company, whose shares are recovering from a 72% plunge last year as investors lost their tolerance for most Internet stocks.
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"This is the most fundamentally undervalued stock that I cover," says Allison Thacker, an analyst at RS Investments of San Francisco. The mutual fund company owns 2.6 million shares of NextCard, according to its most recent filings with the Securities and Exchange Commission.
Despite the excitement over its prospects, NextCard still faces a tough road ahead. As the economy sags, credit-card delinquencies are rising and consumers also are cutting back on credit usage, all bad news for NextCard and its rivals. Meanwhile, competition could stiffen as traditional card issuers move more aggressively to ramp up their Internet operations.
John Hashman, NextCard's chief executive, downplays concerns about delinquencies. As for competition, he says, NextCard has cultivated a deep understanding of online credit-card marketing that its rivals can't easily copy. "That kind of expertise is very important in this business," he says.
Because NextCard is losing money, conventional price-to-earnings ratios for this year aren't available. But the stock, which closed at $8.94 Tuesday on the Nasdaq Stock Market, is trading at less than 12 times next year's estimated earnings, according to Michael Hodes, an analyst at Goldman Sachs. Mr. Hodes rates the stock "market outperform."
Analysts expect NextCard to earn 84 cents a share in 2002, according to consensus estimates from Thomson Financial/First Call. However, Mr. Hodes' PE calculations reflect NextCard's future tax obligations and benefits. The forward PE ratio makes the stock cheaper than the average for the broader credit-card group, which he puts at 15.
To be sure, American Express, the No. 4 card issuer overall, and Providian, the seventh biggest, are trading at more expensive PE multiples than NextCard. American Express has a PE ratio of 17 times next year's earnings, while Providian is trading at 14 times forward earnings. The PE ratio is the price investors are paying for every $1 worth of profit.
The low PE ratio and the outlook for growth in its business makes NextCard enticing.
NextCard's annual net revenue on a managed basis, which includes interest on loans packaged as securities, surged eightfold in 2000 from the year earlier, to $132.5 million from $15.7 million. Mr. Hodes, the Goldman Sachs analyst, estimates net revenue will hit $287.3 million this year.
Meanwhile, the company says it expects to break even in the fourth quarter of this year after extended losses.
In the first quarter of this year, the most recent period available, NextCard lost $16.6 million, or 31 cents a share, compared with a loss of $17.7 million, or 34 cents a share, a year earlier. Net revenue was $57.6 million in the first-quarter compared to $22.7 million a year earlier.
When the company reports its second-quarter results on July 25, analysts expected it to post a net loss of 29 cents a share, according to First Call.
Despite the run-up in the stock this year, some analysts say NextCard's shares still are cheap.
Richard Zandi, an analyst at Deutsche Banc Alex. Brown who has a "strong buy" rating on NextCard's stock, puts a price target of $14 on the stock. He says the stock is now trading at liquidation levels.
Meanwhile, Tom Brown, a former banking analyst who runs Second Curve Capital, a New York hedge fund that invests in financial-services companies, has made some big bets on NextCard.
During the first six months of 2001, Second Curve acquired 2.2 million shares of NextCard, bringing its overall stake in the company to just more than 5%, according to filings with the SEC.
"NextCard has the potential to be a huge winner," says Mr. Brown, who argues that the Internet is an important new channel for credit-card sales. He praises NextCard's online marketing savvy.
Analysts say NextCard's success lies in the extensive market testing, which involves continuously tweaking the terms of its online offers and advertisements to lure customers. "They are constantly working to optimize the pitch," says Aaron McPherson, a research manager who follows online-lending companies for IDC, of Framingham, Mass.
Fears about rising personal-bankruptcy rates and a hazy economic picture have weighed on credit-card companies' stocks this year. American Express, for instance, is down 33% since the start of the year. Capital One is down 10%, MBNA is off 11% and Providian has slipped 4%.
But NextCard isn't totally immune from the pressure affecting its competitors' stocks. Indeed, NextCard's shares fell 7% Tuesday to $8.94. Despite Tuesday's decline, NextCard's stock still remains 96% above its 52-week low of $4.56 on Dec. 20.
Some analysts caution that NextCard's Internet strategy is still untested. Moreover, they say, a prolonged economic downturn could lead to a rash of delinquencies among its customers. "It's easy to lend money; the hard part is getting it back," says Mr. Hodes of Goldman Sachs.
To be sure, NextCard's delinquency rates, or the number of accounts that are late in making payments, have been creeping higher. The percentage of accounts that are more than 30 days past due jumped to 4.75% in the first quarter of 2001 from 3.92% in the previous quarter.
Moreover, Mr. Zandi cautions that there is tremendous uncertainty surrounding the creditworthiness of cardholders who are acquired on the Net. "Credit-card customers have never been gathered in this way before," he says. "Is NextCard managing its risk properly? Only time will tell."
NextCard also faces competition online from traditional players. Providian, for example, announced late last month that it has sold more than one million "smart cards," a line of cards that Providian is marketing for people who make purchases on the Internet.
As for delinquency rates, NextCard's CEO, Mr. Hashman, says the recent rise is part of a "natural seasoning" in his company's credit-card portfolio. In the long run, he says he doesn't expect NextCard's rate of charge-offs -- or accounts written off as uncollectible -- to exceed the industry average of between 6% and 6.5%.
Write to Peter Edmonston at peter.edmonston@wsj.com |
