Staff Reporter
12/21/99 3:30 PM ET
It's taken only a day for shares in Internet service provider Juno Online Services (JWEB:Nasdaq) to double in price. Too bad it could take years to find out whether a company offering free Internet access has a sustainable business model.
Shares in New York-based Juno, best known for its free email service, have climbed steeply since Monday afternoon in a delayed reaction to the company's announcement it would start offering full Internet access for free. The stock, which closed Monday at 29, was trading Tuesday afternoon around 62, up some 115%.
The move -- which puts Juno in direct competition with other free ISPs, notably NetZero (NZRO:Nasdaq) and the free service from CMGI (CMGI:Nasdaq)-controlled AltaVista -- is fraught with risks and won't exactly put Juno on a crash course for profitability.
But that didn't deter investors from jumping on board and talking the stock up on Internet message boards. By Tuesday afternoon, more than 22.5 million shares in Juno had changed hands, about 68 times the average daily volume. And on the Yahoo! message boards alone, investors had posted more than 1,000 messages about Juno since Monday evening.
Let Freedom Ring
Though the market is rewarding Juno for offering free Net access alongside the free email and for-pay Web access it already offers, the jury is still out. As PaineWebber research analyst James Preissler pointed out Monday, "it has yet to be proven that the free ISP business model in the U.S. could be a profitable business model." Nonetheless, Preissler Monday doubled his 12-month price target on the stock to 120 while maintaining a buy rating. PaineWebber was one of the underwriters of Juno's IPO.
ING Barings analyst Youssef Squali, who doesn't have a rating on Juno but rates its competitor NetZero hold, says free ISPs are facing two major negatives as the market gets crowded. First, he says, the cost of customer acquisition is going to substantially increase, "which obviously is bad," he says. Second, the free ISPs will find it difficult to raise advertising rates because of the competition. His firm hasn't underwritten for either company.
Juno President and CEO Charles Ardai says the company has to meet goals in three areas for free access to work.
One, it has to get telecom costs down below the current $2-per-subscriber-per-month rate. Two, the company has to boost advertising and e-commerce revenue past $2 per subscriber per month from the current 65 cents. Three, says Ardai, Juno must benefit from drawing revenue from both subscriptions and advertising, while its competitors among conventional ISPs and free ISPs usually have only one or the other.
Cash Is King. Maybe.
In the first nine months of the year, Juno lost $40.1 million, or $1.39 per share, on revenue of $33.9 million. Preissler doesn't predict profitability in his report, but estimates the company will have revenue of $280 million in 2001. Because of the new venture, he estimates Juno will lose $3.83 per share in 2000, more than double his previous estimate of a $1.73-per-share annual loss.
That said, free ISPs are likely to get a decent share of the market for some time. Squali estimates that the number of active, registered free ISP users will amount to between 15% and 25% of Internet users for some time.
Also, the ISPs aren't short on cash: Juno, for example, had $108 million in cash and cash equivalents as of the end of September. "This could be a long, drawn-out process because these guys are well-capitalized," he says. "These guys could go a couple of years before the law of economics finally catches up to them."
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Juno Online Services (JWEB) 64 3/4 +35 3/4:
There is an FOMC meeting today, and there is plenty of talk that the Fed will move to a tightening bias, highlighted by a hawkish statement directed at the exuberance in the stock market. Frankly, the trading action in a stock like Juno Online Services is providing the Fed the ammunition to do just that. Consider that this stock closed on Friday at 16 3/8. At the close yesterday, it had nearly doubled, and today it is up a mere 123%, bringing its two-day percentage gain to 295%. >
First, yesterday's move was predicated on the company's announcement that it would be expanding its free basic service to include full Internet access. It is not our intention to delve into the details of that move as we discussed it in a Story Stock yesterday; and the full details of the strategic shift can be read in the company's press release. Instead, today's mention of JWEB is more of a diatribe as to how ridiculous some of the trading responses have been to corporate announcements, particularly in the Internet space, and seemingly, anything to do with Linux, B2B, or wireless plays.
Yes, one can rationalize why a stock like JWEB is undervalued relative to its peers, but keep in mind many of the overstretched valuations to which it is being measured against have been built on hype, momentum, and daytraders taking advantage of small floats-- not to mention big assumptions about achievable growth targets. Admittedly, there have been some fundamental reasons why all of the excitment gets started in the first place, and stocks should move higher on such positive developments. In the case of Juno Online Services, the assumption is that by offering free Internet service the company will attract more customers which, in turn, will attract more advertising dollars. Also, there is a sense that customers using the free service will become annoyed by the targeted advertsing constantly displayed on a navigation banner that they will want to pay for the service, thereby driving up subscription revenues.
Okay, fine, we don't have a problem with the stock moving higher on assumptions that the strategic shift will boost revenues one way or the other as those are rational assumptions. What bothers us is the irrational exuberance (yes, we said it) associated with such assumptions as not even the most seasoned market veteran could explain with a straight face how the Juno announcement is worth a one-day gain in the stock of 123%.
We think such price action is dangerous, and ultimately, it is setting up many investors for a hard fall. Remember, there is no real metric for momentum. You just have to hope you are on the right side of the trade when the momentum shifts. Now, they say hope springs eternal so play the game if you must, but bear in mind that there are plenty of instances among the Internet stocks where hope has proven to be ephemeral.-- PJO |
