I would look at this company based on fundamentals to see if it is a buy or a sell:
I would value this company as an ISP and not a CLEC for the time being. If you think this company is a CLEC and is in the same group as ESPI, MCLD, etc. you are mistaken. LOAX is by any yardstick a plain old internet service provider that went public and put the high speed access spin on it to drive the stock up.
From an investment perspective, I would look at comparable ISP valuations to see how overvalued this stock is. You won't find many ISPs this small in the public market because most underwriters want to stay around for a long time and won't do deals like this. LOAX was shopped to several investment banks and turned down many times before they found a banker who would do the deal.
Facts:
1) There are 4000+ ISPs and they are all consolidating and giving the market excellent comparables on what ISPs trade for.
2) An excellent valuation metric is looking at the monthly recurring revenue (MRR) and annualizing it and then looking at each ISP as a multiple of the Annualized MRR. This is the metric that ISPs use to decide what other ISPs they should purchase out of this 4000+ universe.
3) I have looked at over 200 Internet Service Providers and they trade on average at between 2-4 times their Annualized MRR. Very rarely will you see one trade outside of that range.
4) You look at LOAX and estimate that their AMRR is 1.2M based on strong growth over their Q4 '98 revenue.
5) This means that right now LOAX is trading at 160+ their AMRR or 40 to 80 times higher than the average ISP which means 1) They would have either have to generate 13-26 Million in recurring dial up or dedicated access revenue this quarter or 2) The price of LOAX would have to come down to $1.00 (4 X AMRR) OR 3) you'd have to say this company is so good you need to break the rules (ie, strong mangement team, Goldman Sachs underwriting, first mover in a new large rapidly growing market.
LOAX is not a company to break the rules on, ie:
0) The products that the company is offering are not the first to market by any yardstick and these services will likely become commoditized and price driven. We already have seen that with recent DSL pricing announced by AOL, $40 per month which is close to the wholesale cost assuming you owned your own DSL equipment. Today US West announced DSL pricing at $32 per access line per month. LOAX can't compete at these prices without scale.
1) There are a large # of investors who invested in the private equity before the public that are subject to a lock-up agreement before they can sell (These are the guys sweating like heck and posting positive messages on this board). When this agreement expires the additional float, combined with the fact that the trading volume may be lighter, and the additional selling volume may drive the stock towards its real value.
2) The underwriter potentially may not have the capacity to put a good analyst on the stock and provide adequate after market support therefore the stock would become thinly traded and lose institutional support. I don't have any #s on how many ISP or Internet Analysts Dirks has or how many market makers their firm can provide to keep liquidity and interest high. I don't think they have a good broker network, but I've never heard of them so I'm not sure either way. ASK DIRKS OR ANY OTHER COMPANY TO SEND YOU A RESEARCH REPORT. THIS COMPANY HAS THE POTENTIAL TO TRADE LESS THAN 40K SHARES PER DAY WHEN INITIAL INTEREST DRIES UP AND SHORTS COVER. Zero institutional ownership here for support.
3) LOAX was in operation during one of the highest growth periods for ISPs and didn't execute and grow as fast as its peer group. From 1992 to 1998 they only grew to 700K in revenue.
4) The CEO was director of Norhteast Business Associates which ceased operations in 1992 and was a sales rep for Horizon Distributors which declared banktrupcy. He doesn't have the telecom experience to run a CLEC. Look at the CLECs out there today and their backgrounds and you'll see a much different pedigree.
5) The company only has 10 people, so they would each have to generate 1.3-2.6 million a piece in revenue this quarter to bring the companies revenues in line with their market cap.
IGNORING ALL THE STUFF ON DIRKS, THE CEO, ETC. THIS COMPANY IS FUNDAMENTALLY OVERVALUED ACCORDING TO THE VALUES THAT ARE BEING PAID FOR SIMILAR COMPANIES OUT THERE IN THE ISP SPACE.
|
