PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
Back in February, I wrote about Infospace (
INSP), touting the brilliance of its Internet-infrastructure strategy and remarking that at $153 a share, some analysts believed there was plenty of upside to the stock. That was before April, when the bottom fell out of the Nasdaq and the stock split 2-for-1. Since then, the share price has dropped more than 80%. But I'm returning to it in order to argue that the company is better positioned for earnings growth today than it was six months ago.
In fact, with its recent $4.2 billion all-stock offer for Go2Net (
GNET), Infospace has actually improved on prospects that were already pretty good -- by addressing its main weakness, a potentially too-narrow focus on wireless. For now, the market hates the deal. Infospace's stock price dropped from the mid-$40s to less than $30 after the July 26 announcement. But Go2Net actually rounds out Infospace's product offerings with the addition of broadband capabilities as well as some consumer-oriented applications to help deliver its product line.
Combined, Infospace and Go2Net will have a strong position in content for both wireless and broadband platforms. Infospace's forte in wireless is what attracted eight of the nine top telecommunications carriers around the world to its portal services. Go2Net adds the broadband component to Infospace's strength. It sells content (search engine, personal finance, multiplayer games, and e-commerce solutions) to broadband companies including cable, DSL, and satellite providers. It also has such Web sites as Silicon Investor, which is aimed at investors interested in technology, and HyperMart, which is targeted toward small businesses looking for e-commerce solutions.
A DELICIOUS BLEND. The question nagging the market right now is whether the two companies are like peanut butter and chocolate -- two great tastes that taste great together. On paper at least, the blend is a good one. The joined companies create the largest existing end-to-end merchant network, according to Merrill Lynch analyst Sofia Ghachem. Infospace has 600,000 merchant customers, and Go2Net has 1.1 million. Infospace sells them front-end tools for creating Web sites, such as Store Builder and Page Express as well as Active Promotions, a software that credits promotions to credit-card purchases by consumers over the Net. Go2Net sells back-end software like Authorize.Net. A payment-processing platform used by roughly 82,000 merchants, Authorize.Net is probably the most widely used payment-processing platform on the Net.
As far as consumer applications go, Infospace has the reach and Go2Net has the applications. By the end of June, 3,100 sites used Infospace's software, including four of the five most-trafficked Web sites. Its software has "an unduplicated reach of 92% to all Internet users," according to a research report by Vik Mehta, a vice-president and mobile-Internet analyst at Goldman Sachs. The merged companies can use this broad client base to push out Go2Net's search engine, MetaCrawler, as well as its games and message board products. "Gaming and entertainment are an important aspect of how consumers relate to personal appliances," Mehta said in a telephone interview.
Both companies license software that serves merchants and consumers, but their products address different needs. "On the consumer side we were missing a search engine, a message board, and gaming applications. [G2Net] sold those but were licensing everything else," says Infospace Chairman Naveen Jain, who will retain the chairman title after the acquisition is complete. "On the merchant side, we had front-end applications but no back end. [G2Net] had backend but no front end. Together we will provide a complete suite of solutions."
SEASONED MANAGEMENT. In addition to product synergies, broadening Infospace's capabilities across delivery platforms is crucial to the company's success. "About 70% of the stock's performance is because of the overall correction of the Nasdaq, about 30% is because the perception that mobile commerce is further off than everyone thought it would be initially," says John Graves, analyst at S.G. Cowen & Co.
To be sure, even as the market readjusts its expectations about mobile commerce, competition in wireless-software applications is heating up from private companies. "The competitive dynamic has increased," says Goldman's Mehta. "Now it looks like one company won't capture 100% of the wireless [applications] market -- maybe the top five companies will capture about 50% between them. Go2Net allows Infospace to get a 15% market share, vs. the 10% it would be able to capture without it."
As complementary as the companies' products are, its management seems to be even more so, according to analysts. Jain is seen as the visionary and big-picture thinker. Below him, Arun Sarin will continue as CEO and assume the new title of vice-chairman. As former CEO of Vodafone/Airtouch in the U.S. and Asia, Sarin is considered one of the best wireless managers in the business. Russ Horowitz, CEO of Go2Net, will become president and vice-chairman of the merged company. His execution capabilities in broadband are considered equal to Sarin's in wireless.
If you still believe in the Net and the necessary infrastructure to make it work, Infospace could be a pretty attractive stock at current levels. But expect some wobbles as the market continues to digest the Go2Net acquisition. Wall Street analysts are pretty bullish on both companies. The consensus 12-month target price for Infospace without Go2Net ranges from $83 to $240, according to First Call data. Five of the six analysts who cover Go2Net valued that independent company between $70 and $115, considerably higher than its current price in the low $50s.
PROMISING. Between its seasoned management and its suite of products, the new Infospace's earnings picture looks promising. Both companies have operating profit margins in the low 30s. Go2Net is profitable, and analysts have predicted earnings of 72 cents a share for fiscal 2000 on a stand-alone basis, vs. 81 cents for 2001. Although Infospace's recent acquisition binge has hit its earnings, its fiscal third-quarter losses of two cents a share reported July 26 beat analysts' expectations by three cents. Consensus for the fiscal year ended Sept. 30 is a loss of eight cents a share, and profits of seven cents a share in fiscal year 2001 without Go2Net.
Without exploiting any synergies, the benefits of the acquisition will show up on the bottom line. In fiscal 2000, Cowen's Graves predicts earnings per share of four cents, and revenues of $203 million. In 2001, Cowen's Graves anticipates earnings per share of 16 cents, and revenues of $360 million.
That all sounds pretty good, but then things sounded just as good back in February too. It's true, Jain says, "you can't judge how well a company is doing [in terms of earnings growth] by its stock price." For investors looking to get in on an Internet infrastructure convergence play, Infospace is well positioned and this time around, more reasonably priced than ever.
Popper covers financial markets for BW Online in New York Edited by Beth Belton
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
Printer-Friendly Version
