What's Behind Broadcast.com's Climb?
By Tiernan Ray
FIRST it was Amazon.com (AMZN) and the Internet as the interactive version of the Home Shopping Network. Now it's the Internet as television. Or is it some bizarre version of interactive, 3-D television? There are doubtless other ways to explain the astounding 117% two-day rise in the stock of Broadcast.com (BCST), but this one is as good as any.
Broadcast.com makes money running online video and audio feeds for venues as diverse as Intel's (INTC) quarterly conference calls and Johnnie Cochran's half-hour nightly TV show. The stock was briefly halted by the Nasdaq Friday morning, after soaring as much as 74%, but trading resumed after company officials shrugged their shoulders and said they had no idea what was happening with the stock. Broadcast shares climbed as much as 54% on Thursday, finally closing up 44% at 132. By late afternoon trading Friday Broadcast shares closed up 49% to close at 197 1/2, after briefly approaching an earlier high of 230 in the final few minutes before the bell. (There are no options contracts on Broadcast stock yet; the American Stock Exchange says options will start trading on Jan. 21.)
From a glance at the prices of Internet stocks this afternoon, you might simply have thought the jump in Broadcast.com was just Internet Jr. having its day: A lot of Internet stocks commonly thought of as the "second tier," including Geocities (GCTY), Real Networks (RNWK) and Lycos (LCOS), and wireless cable company Internet Media (USRF), were all up sharply Friday. Geocities, which gives surfers free home pages on the Web, was up 44%, while Real Networks, which competes with Microsoft in distributing the audio-video software that makes Broadcast's live venues possible, was up as much as 29%.
But at least one analyst was able to put it all together more cogently. Phil Leigh, senior Internet stock analyst with Raymond James in St. Petersburg, Fla., says Broadcast.com is in the front ranks of what he considers the "third wave" in the Internet's development. Explaining that shoppers at sites such as Amazon.com (AMZN) and eBay (EBAY) will someday interact with virtual-reality models of other Web surfers, dubbed "avatars," Leigh says that Broadcast is going to be one of the arms merchants making interactive selling a reality on the Web. The idea of three-dimensional "fly-through" experiences, and so-called avatars that stand in for a surfer when they go online is an old one, but Leigh says Broadcast may finally be making the idea practical.
"Marshall McCluhan said that content will fit function, and on the Web, interactivity is the function and so the companies that help provide that interactivity are going to be out in front." Broadcast is one such company, he says. Leigh points out that Broadcast.com has been hosting online versions of expensive industry conferences, such as a recent Business Week tech conference, and that giving people access to such forums over the Web is going to be a big part of BCST's business in the near future. "People will pay money to go online and be able to hang out in the equivalent of a conference hallway and swap email addresses with their colleagues," says Leigh.
However, a former contractor for Broadcast.com early on says all that sounds like hooey. "Broadcast.com has a great story, but it's a simple media story, akin to a cable company. If there was ever any wild, secret plan for avatars and all this stuff, it was never ever mentioned at the road show or the IPO."
Leigh, who drafted a paper on the third wave back in December, was not at Thursday's Morgan Stanley technology conference, which preceded the initial jump in Broadcast.com shares, and couldn't comment on the role the conference may have played in the jump. There were no brokerage revisions of estimates or ratings following the conference, and no news from the wire services, so the movement in the company's shares following the event is mysterious.
If institutional investors rushed to the pay phones following the conference, it was not evident in Friday's or Thursday's trading: Both days saw minimal block trades, a usual sign of high institutional investor interest.
Leigh, who still maintains his Accumulate rating on the stock despite its climb in the past two days, says in his personal opinion he thinks as much as one million shares may come on the market after Jan. 14, when options on registered shares held by the underwriters expire. That would mean a tremendous amount of supply flooding the market for Broadcast.com, which has a float of only 2.5 million shares available to trade. The company turned that float once today on volume of 2.7 million shares traded.
Nonetheless, Leigh is still advising clients to pick up shares, and he believes the stock has substantial room to appreciate from today's levels, though he declined to offer a target price. "The only mistake you can make with the Internet is selling too early," says Leigh. He should know. He's still kicking himself for selling his Amazon.com shares shortly after the company's IPO.
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