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Would you love a stock at 10, as much as you did when it was flying high at 60? Such kinds of questions are being raised about Internet and technology stocks, which have lost a great deal of their market value since late March, when the stock market started plummeting. Take high-flying Be Free (BFRE), a provider of Internet technology and marketing services to online merchants. Its stock got shot down when it was aloft at 60 a share, and by Apr. 17, it had plunged to 7. "What did I do then -- I just bought more shares at that ridiculous price," says investment pro Andy Lanyi, who had accumulated Be Free shares at much higher prices months before. "It was like buying the stock at its IPO price," he adds.
Be Free went public in November at a split-adjusted 6 a share. (It split two-for-one in March.) Lanyi argues that the stock, which since Apr. 17 has gone up to 11, could easily double this year. What's behind his bullishness? "The fundamentals of the niche Web business that the company is in haven't changed, and its prospects for growth remain the same," says Lanyi, who heads Lanyi Research at CIBC World Markets.
FAST CLIP.
Be Free, he explains, has developed technology that enables e-merchants to place Internet advertisements where the probability of reaching the targeted audience is highest. The technology, he says, creates the infrastructure for a type of Internet-based advertising called "affiliate marketing." It helps merchants automate the online linkup of its ad campaign with certain specialized Web sites, or affiliates, that offer the best chances of reaching the highest number of desired customers. Be Free sets up the online infrastructure through a proprietary software technology integrated with Sun Microsystems' servers, EMC's storage devices, and Oracle's database. Each time a consumer clicks on an ad promotion, Be Free's system tracks it. When a sale is made, it coordinates the exchange of information between the merchant and the affiliate, or Web site.
Be Free's customer base has been widening at a fast clip, increasing from 164 at the end of 1999 to 300 in March. Some of the major customers: America Online, Yahoo!, Priceline.com, Barnes&Noble.com, Lycos, eToys, and Ask Jeeves. According to Media Metrix, Be Free's customers included 14 of the 50 most active Web sites. "Affiliate marketing is gaining popularity with a broad spectrum of the Web's leading brands because it is the most cost-efficient method of promotion on the Web," says analyst James Pettit of Chase Hambrecht & Quist. It is four to six times more effective than banner ads in terms of click-through percentage, says Pettit, who has a buy rating on Be Free.
Be Free's revenues are growing rapidly, says Lanyi, although the company has yet to make money. Lanyi figures that this year, revenues will hit $14.8 million and jump to $28 million next year, up from 1999's $5.3 million. Lanyi thinks the company will achieve gross-margin profitability in 2002 and post net profits in 2003. The company gets 2% of the proceeds from customer sales that it helps to generate. Some 85% of the company's revenues come from a combination of transaction-based fees, plus minimum monthly fees of $2,000 to $3,000 from each client. The rest comes from optional services and one-time implementation fees.
"POWERFUL EXPLOSION."
"Be Free is well positioned to benefit from the powerful explosion of e-commerce and e-marketing activities," argues Lanyi. He cites a Forrester Research study and Jupiter Communications estimate that the market for business-to-consumer online sales will grow from $25 billion in 1999 to nearly $200 billion in 2003. And spending on Web-based ads is expected to expand from $3.3 billion in 1999 to $24.1 billion by 2003.
Lanyi notes that Be Free dominates the affiliate marketing business that is the key arena for performance-based advertising. Unlike banner ads, the impact of these ads can be measured directly. Performance-based ads accounted for 15% of total Web advertising last year, says the analyst, and is expected to balloon to 50% by 2003.
"Be Free's stock is not free -- but almost -- at its currently low price," says Lanyi. "It's like getting a second shot at an IPO."
Senior Writer Marcial has been writing Business Week's Inside Wall Street column for 18 years. Catch his online column every Tuesday afternoon
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