Heard On The Street: Internet Service Providers Lure Investors
July 24, 1998 12:03 AM
By Thomas E. Weber and Jared Sandberg, Staff
Reporters of The Wall Street Journal
The Rodney Dangerfields of the Internet are finally
getting some respect.
Internet service providers, those onramps to the global
computer network, are getting a loving look from
investors. Since the beginning of this week alone,
MindSpring Enterprises has shot up 43%, as has
PSINet, which provides businesses with high-speed
Internet connections.
While the much-discussed Web "portal" services such as
Yahoo! and Excite and on-line retailers such as
Amazon.com have generated investor exuberance --
irrational, to many -- Internet service providers, which
are the companies that bring the Internet home to users,
had largely been left out of the party.
Conventional wisdom once had it that Internet service
providers such as MindSpring, EarthLink Network and
PSINet would be clobbered by telecommunications and
cable-TV companies, which could use their existing
infrastructure with relative ease to extend into the data
realm. Internet access would become a commodity, and
only the giants could survive the pricing pressure, the
thinking went.
But it hasn't quite worked out that way. Far from
fearsome, telecom titans have stumbled in the on-line
world. Now, the few companies focused solely on
Internet access have earned new respect.
Why? While money losers such as Excite, CDNow and
Amazon.com are betting on the untested business of
on-line marketing and commerce, Internet service
providers are in the more mature -- and often profitable
-- business of putting people on-line. Think of them as
the phone companies of the Internet.
Their revenue streams are fairly stable -- they
automatically charge your credit card each month for
access -- and their assets are tangible, including the
modems and routers of their far-flung communications
networks. And the customer bases are more stable; they
find it more difficult to switch service providers than to
switch search engines.
"The conventional wisdom was that no one could ever
make money at this business," says Charles Brewer,
MindSpring's chief executive officer. "People saw us as
some sort of perpetual loss leader. That's just stupid."
Mr. Brewer also says that the longtime bugaboo for
these stocks -- the possibility of phone companies
trouncing small service providers -- is a myth. "The
infrastructure assets they bring to the party just aren't
relevant," since phone networks largely are based on
old-fashioned voice circuits.
MindSpring, a consumer-oriented Internet service based
in Atlanta, has seen its shares climb since it delivered on
Wednesday something that scores of other Internet
companies have yet to approach: earnings, albeit small
ones. For the quarter ended June 30, it reported a profit
of $2 million, or 24 cents a diluted share, on revenue of
$25.1 milllion.
Analysts agree that phone companies have fared poorly
in their Internet efforts. While telecom concerns are
good at owning the fiber that these Internet providers
run on, they have been slower to pick up business and
consumer users than WorldCom's UUNet Technologies
and others.
And that leads many observers to believe that Internet
service providers are prime takeover targets, by phone
companies or others -- another probable factor behind
their stock run-ups.
Ulric Weil, a senior technology analyst at Friedman,
Billings Ramsey, says telecom companies are coming to
the conclusion that they can't simply do it themselves,
fueling speculation that MindSpring and PSINet could
be takeover targets. "To try to do it in-house takes too
much time," Mr. Weil says.
Thursday, MindSpring's Mr. Brewer coyly hinted his
willingness to sell. "There's a seed of something really
good here, and that seed might be able to come to its
fullest flower as part of some bigger organization," he
said.
Even after their recent run-ups, Internet service stocks
remain relatively tame when compared with Net
highfliers. Yahoo, trading at 189 3/8, commands a
dizzying stock-market value of $8.4 billion. That is about
51 times an annualized version of its latest quarterly
revenue. (Price-earnings ratios can't often be applied
because earnings are so scarce.)
But MindSpring is trading at only 12 times its annualized
quarterly revenue, Concentric Network at about five
times annualized revenue and EarthLink at about three
times annualized revenue. Even America Online,
hovering near its alltime high, trades at around 10 times
annualized revenue.
That's why William L. Schrader, chairman of PSINet,
thinks Wall Street is warming up to his company. At the
start of this year, the company's shares were languishing
at 5 3/8; Thursday, the shares closed at 19 1/4, up 3
5/16.
"We are the infrastructure that the Yahoo traffic rides
on. We are tangible."
Copyright (c) 1998 Dow Jones & Company, Inc.
All Rights Reserved.
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