Our Amzn?
"money loser?" Irrational exuberance?
I'm appalled.
LP
interactive.wsj.com
Heard on the Street
Internet Service Providers,
Long in the Cold, Catch Fire
By THOMAS E. WEBER and JARED SANDBERG
Staff Reporters of THE WALL STREET JOURNAL
The Rodney Dangerfields of the Internet are finally getting some respect.
Internet service providers, those on-ramps to the global computer network,
are getting a loving look from investors. Since the beginning of this week
alone, MindSpring Enterprises has shot up 43%, as has PSINet, which
provides businesses with high-speed Internet connections.
While the much-discussed Web "portal" services such as Yahoo! and Excite
and on-line retailers such as Amazon.com have generated investor
exuberance -- irrational, to many -- Internet service providers, which are the
companies that bring the Internet home to users, had largely been left out of
the party.
More Respect
Internet service providers, some long considered iffy prospects, are getting another look
amid the Internet stock mania:
Name
Past
12 months
% chg.
this week
MindSpring Enterprises
+1,004%
+43%
PSINet
+105
+43
Concentric Network
+146*
-19
EarthLink Network
+688
+7
*Change since initial public offering July 31, 1997
Conventional wisdom once had it that Internet service providers such as
MindSpring, EarthLink Network and PSINet would be clobbered by
telecommunications and cable-TV companies, which could use their existing
infrastructure with relative ease to extend into the data realm. Internet
access would become a commodity, and only the giants could survive the
pricing pressure, the thinking went.
But it hasn't quite worked out that way. Far from fearsome, telecom titans
have stumbled in the on-line world. Now, the few companies focused solely
on Internet access have earned new respect.
Why? While money losers such as Excite, CDNow and Amazon.com are
betting on the untested business of on-line marketing and commerce,
Internet service providers are in the more mature -- and often profitable --
business of putting people on-line. Think of them as the phone companies of
the Internet.
Their revenue streams are fairly stable -- they automatically charge your
credit card each month for access -- and their assets are tangible, including
the modems and routers of their far-flung communications networks. And
the customer bases are more stable; they find it more difficult to switch
service providers than to switch search engines.
"The conventional wisdom was that no one could ever make money at this
business," says Charles Brewer, MindSpring's chief executive officer.
"People saw us as some sort of perpetual loss leader. That's just stupid."
Mr. Brewer also says that the longtime bugaboo for these stocks -- the
possibility of phone companies trouncing small service providers -- is a myth.
"The infrastructure assets they bring to the party just aren't relevant," since
phone networks largely are based on old-fashioned voice circuits.
MindSpring, a consumer-oriented Internet service based in Atlanta, has seen
its shares climb since it delivered on Wednesday something that scores of
other Internet companies have yet to approach: earnings, albeit small ones.
For the quarter ended June 30, it reported a profit of $2 million, or 24 cents a
diluted share, on revenue of $25.1 million.
Analysts agree that phone companies have fared poorly in their Internet
efforts. While telecom concerns are good at owning the fiber that these
Internet providers run on, they have been slower to pick up business and
consumer users than WorldCom's UUNet Technologies and others.
And that leads many observers to believe that Internet service providers are
prime takeover targets, by phone companies or others -- another probable
factor behind their stock run-ups.
Ulric Weil, a senior technology analyst at Friedman, Billings Ramsey, says
telecom companies are coming to the conclusion that they can't simply do it
themselves, fueling speculation that MindSpring and PSINet could be
takeover targets. "To try to do it in-house takes too much time," Mr. Weil
says.
Thursday, MindSpring's Mr. Brewer coyly hinted his willingness to sell.
"There's a seed of something really good here, and that seed might be able
to come to its fullest flower as part of some bigger organization," he said.
Even after their recent run-ups, Internet service stocks remain relatively
tame when compared with Net highfliers. Yahoo, trading at 189 3/8,
commands a dizzying stock-market value of $8.4 billion. That is about 51
times an annualized version of its latest quarterly revenue. (Price-earnings
ratios can't often be applied because earnings are so scarce.)
But MindSpring is trading at only 12 times its annualized quarterly revenue,
Concentric Network at about five times annualized revenue and EarthLink
at about three times annualized revenue. Even America Online, hovering
near its all-time high, trades at around 10 times annualized revenue.
That's why William L. Schrader, chairman of PSINet, thinks Wall Street is
warming up to his company. At the start of this year, the company's shares
were languishing at 5 3/8 ; Thursday, the shares closed at 19 1/4, up 3 5/16.
"We are the infrastructure that the Yahoo traffic rides on. We are tangible." |
