CB, for your leisure reading, from today's WSJ. Enjoy.
Regards,
Tom
June 4, 1999
Heard on the Net
CustomTracks and Analyst
Have Skeptics on Wall Street
By CARRIE LEE
THE WALL STREET JOURNAL INTERACTIVE EDITION
When it comes to CustomTracks, and the bullish research report that ignited
its stock last week, Wall Street isn't impressed.
Sure, CustomTracks stock surged 15 points in just one day after brokerage
firm Joseph Charles & Associates lauded the Houston company, which aims
to break into the business of ensuring the security of financial transactions on
the Net. That rally stirred up a lot of interest among participants in online
message boards.
But CustomTracks, which has no products on the market at this point and
has switched business plans several times in recent months, faces challenges
in taking on the likes of Verisign, the industry leader. And analysts aren't
impressed with the logic behind Joseph Charles's bold prediction that
CustomTracks' stock could hit a price target of $230 a share.
CustomTracks, whose name still harkens a prior business plan to sell
customized music CDs over the Internet, saw its shares climb as high as 90
in the frenzy created last week by Joseph Charles, a brokerage firm based in
Boca Raton, Fla. By Thursday, though, the stock was quoted at 51 1/8 on
the Nasdaq Stock Market, down 3 1/2 for the day.
David Weinstein, director of institutional
research at Joseph Charles who wrote the
research report, has been a fan of
CustomTracks since last fall, when the
company had its eye on the music business.
Last September, he called the stock "very attractive," and in December, with
the stock trading below 10, Mr. Weinstein predicted it would hit 17 within six
months.
Mr. Weinstein stayed loyal to the company this year when CustomTracks
abandoned the music business amid competition from new technologies and
when efforts to obtain music-content rights were delayed. He believes the
company, flush with cash from divestitures last year and headed by
Blockbuster Entertainment's founder, David Cook, has the wherewithal to
match Verisign's market share in e-commerce security.
But that's not the way some on Wall Street see it. Several analysts who
follow e-commerce security companies, and the managers of several
investment funds with holdings in the industry view the likelihood of
CustomTracks' success as a long shot.
CustomTracks "has never appeared on the radar screen and all I do is follow
information security," says Paul Saunders, an analyst with SoundView
Technology Group, a research firm based in Stanford, Conn. "The likelihood
of [CustomTracks] being a major player and replicating what Verisign has
done is very, very small," he says.
CustomTracks officials declined to comment.
Analysts say that Verisign has already made a significant impact in the
e-commerce field. The top 40 e-commerce sites are Verisign customers, as
are more than 400 of the largest companies that are on the Internet, says
John Puricelli, an analyst at A.G. Edwards in St. Louis. "It took Verisign four
years of diligent effort to get to this point. They spent over $75 million on
their computer room alone," he says. "Verisign issues [digital] certificates
and then supports them 24 hours a day, seven days a week. ... It's not an
easy thing to get into."
Digital certificates are electronic identification tools that help ensure that
consumers' orders -- and credit-card numbers -- reach the intended online
merchant, Amazon.com, for instance, and not a phony site pretending to be
Amazon.
Analysts say the vast majority of browsers today are compatible with
Verisign's digital certificates, and they say newcomers to the security
business will have a hard time usurping Verisign's relationships with browser
developers. "Even if [CustomTracks] were able to get into the browsers,
there are millions of computers out there that already have the older
authorities in them," says David Zale, an analyst at Sand Brothers in New
York. CustomTracks also "would have to initiate relationships [with
merchants] so they could have their certificates imbedded," he says.
For his part, Stratton Sclavos, the chief executive of Verisign, doesn't feel
threatened. "It's highly unlikely that something can come out of the blue with
an unproven technology and infrastructure and with no brand recognition" to
challenge Verisign, he says. Mr. Sclavos says he hadn't heard of
CustomTracks until the Joseph Charles report was released.
Still, Mr. Weinstein, of Joseph Charles, isn't discouraged. He believes
CustomTracks can match Verisign's position because the market for
Internet security products is far from saturated. Analysts estimate that there
is a market for 12 million digital certificates today and that Verisign has
issued more than 125,000 so far to e-commerce businesses. "They only own
1% of the market; 99% of the market is untapped, so entry is not difficult,"
Mr. Weinstein says.
Moreover, Mr. Weinstein maintains that the CustomTracks system will be
superior because credit card and other personal information will be stored on
CustomTracks servers, instead of with a merchant's server.
As for the $230 price target for CustomTracks shares, Mr. Weinstein says
he arrived at that number based on the assumption that the company will
match Verisign's 1% market share. The price target is simply the price at
which CustomTracks stock would trade if its total market value were to
reach Verisign's roughly $3.5 billion value, he explains.
Michael Flanagan, an independent analyst in Fort Washington, Pa., who
follows the brokerage industry, says Mr. Weinstein's methodology requires a
"huge leap of logic."
Joseph Charles isn't a widely known brokerage firm. Part of the reason its
price target generated so much attention is because the firm issued a press
release to announce its research report. John Busacca, director of
compliance for the firm, says it frequently uses releases to promote its
research because employees are restricted from placing trades in a security
until the firm's stance becomes public information.
Wall Street brokerage firms typically don't distribute their research using
press releases. Instead, they usually leave it to their brokers to distribute
research to clients. Joseph Charles disseminated its release via PR
Newswire, a New York wire service that publishes releases for a fee. It
charged Joseph Charles about $130 to run its release, which was widely
available on Internet sites, such as Yahoo Finance (quote.yahoo.com) that
use the wire for news content.
Joseph Charles says it has about 200 employees, including 150 brokers in
nine offices throughout the U.S.
Mr. Weinstein says Joseph Charles wasn't paid by CustomTracks to
disseminate the report, and that the firm has never owned shares of
CustomTracks stock. He says he personally purchased CustomTracks
shares when they were trading around 30. He declines to state the total
value of the CustomTracks shares he owns.
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