SMARTMONEY.COM: We Told You So!
(Just my way of introducing myself to the thread
as a new stockholder in this company..This article
gives an excellent overview of recent events. Peter)
By IAN MOUNT/Dow Jones Newswires/February 29, 2000
NEW YORK -- BEING RIGHT all the time is not the worst thing in the world.
Back on Aug. 10, we ran a screen on a little-known online-banking software firm called Security First Technologies (SONE). At the time, the Atlanta-based company - which has since changed its name to the far more enigmatic moniker S1 - was trading in the mid-20s.
It was not what you'd call an investor favorite. As we pointed out then, an unpleasant amalgam of worries - corrections in the financial-services and Internet sectors and problems digesting acquisitions - had beaten the stock down more than 60% from its 52-week high of $65.50. S1 looked decidedly low budget.
But recently things began to change. On Monday, the stock closed at $96.50, an increase of more than 250% over the last six months. Something evidently got funky down in "Hotlanta."
As it turns out, a medley of events, none so huge as to attract excessive investor attention by itself, has resuscitated the company's stock and turned a low stumbler into a highflier.
First, in September, the company announced it had renegotiated a previously announced deal to acquire FICS Group, a Belgium-based Internet banking software maker. Some on the Street thought that S1 was overpaying in the original deal. The new deal gave FICS less up front and more in performance-based payments, providing an incentive for FICS and a discount for S1 if things went south.
Then, two days later, the company announced it was purchasing VerticalOne, a private company (also based in Atlanta) that helps people organize their financial lives by combining banking accounts, bills, frequent-flier accounts and the like at one place on the Internet. Those two acquisitions were completed in November, along with that of Edify, a Santa Clara, Calif., company that sells customer-service and small-business banking software.
The stage was set for a PR blitzkrieg. During the first week of December, S1 hired the Beach Boys for a bank executives' conference in Miami (no kidding) and then, two weeks later, hosted an analysts' conference at which it unveiled an alliance with financial giant Zurich Financial Services Group.The company also undressed new financial "guidance" for analysts, numbers that promptly sent the Street into a paroxysm of unadulterated joy (or the financial equivalent).
"The reason the Street's gotten so supportive is that it sees a business-to-business Internet offering that is a good business model," says Chuck Ogilvie, the company's general manager. "And a management team that's got gray hair."
Immediately after the meeting, First Union Securities raised the company's rating from a Buy to Strong Buy, followed several weeks later by U.S. Bancorp Piper Jaffray. During the next six weeks, Robertson Stephens and Lehman Brothers initiated coverage with Buys, JC Bradford started the company with a Strong Buy and, no doubt needing to reiterate its Big Kahuna status, Goldman Sachs initiated coverage on Feb. 16 with a place on its closely watched Recommended List and a share-price target of $215.
"When estimates came to light, that's when the stock started to run," says Robert Martin, an analyst at Friedman, Billings, Ramsey & Co. "With all that [they announced], you basically had an acceptance by the market that these guys were the top-tier player in the market."
The funny thing - and what makes us feel so prescient about our August screen - is that the company hasn't fundamentally changed its business model over the last seven months. It still aims to license its banking software to as many of the largest financial institutions as possible; still earns the lion's share of its revenues from consulting on the installation and upkeep of such systems; and still believes its data centers - where it handles online-banking transactions for its customer banks - are the hope for its future.
What happened? S1 simply did more of what it does than people expected. And it also began to do a better job selling itself to the market.
Specifically, S1 told analysts that it had 57 of the 100 largest financial institutions as customers. Numbers like those look especially stupendous when you consider the company aims to work with the 100 largest financial institutions. Right now, S1 is batting .570. On the data-center front, the company has 12 users, another dozen ready to go in the next few quarters and 40 more in the pipeline.
But can a case be made that this hot stock is now overvalued? After all, even though it has pulled back substantially from its Feb. 16 intraday high of $142.25, it's trading at about 14 times its expected revenues for 2000. And its cash cow may be showing signs of age. S1's much-vaunted data-center business, which is supposed to provide stability through recurring revenues (analysts estimate S1 charges banks $3.50 for each customer per month), accounted for just 9.5% of revenues in 1999, down from 13.2% in 1998.
Moreover, adoption of Web banking is far from a done deal. Just 4.7 million, or less than 5% of households, were actively banking online at the end of 1999, according to Forrester Research.
True, Forrester predicts the number of active online banking households will soar to 18.5 million by the end of 2003. But not everyone agrees. On the other end of the spectrum is Cyber Dialogue. Using research indicating that 6.3 million people used Internet banking to perform transactions between August 1998 and July 1999, Cyber Dialogue pegged the industry's growth at 2% a year. That's not exactly explosive growth.
Suddenly it all looks different. Obscene valuations, slow consumer adoption, data-center revenue that shrinks as a portion of total revenue. In an instant, the mid-20s price last August looks more realistic.
Don't be fooled. It looks like S1 has plenty of room to run, and might actually be cheap. Here's why.
First, the valuation. Though the company trades at an absurdly high multiple, for a Web company it's borderline inexpensive. In comparison, market leading "enabler" companies like Inktomi (INKT), Ariba (ARBA) and Commerce One (CMRC) trade at up to 100 times revenues. Analysts' price targets for S1 run from 30 to 50 times 2000 revenues.
Second, there's the consumer-adoption question. According to George L. Barto, of the Internet research firm GartnerGroup, online banking is moving from the smaller "early adopter" user category into the larger "early majority" group.
Last, and most important, there's the data-center revenue question. A second look suggests there's little reason to be troubled. True, at 178% growth in 1999, data-center sales aren't rising as fast as the business as a whole, which jumped by 284% . But Ogilvie says that's really because of S1's recent acquisitions. Now that S1 has more revenues in other areas, its data-center business has shrunk by comparison. That will change when S1 changes the business models of the newly acquired companies.
"Since we've bought the companies, we've changed their business models to mirror ours," Ogilvie says.
Here we'll try to refrain from usual journalistic procedure and hold off on the cliches ("Of course, only time will tell. Of course, the market's not always rational") and simply say that a few stumble-free quarters of data-center growth along with an increase in consumer adoption could take this stock significantly higher.
If Tuesday was any guide, it's already on its way. After S1 gave a positive presentation on its future at a Robertson Stephens conference in San Francisco, the stock ran up $4.13, or 4.3%, to $100.63.
But, of course, only time will tell.
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