IP: TheStreet.com: The Bizarro World of Network Solutions

[Dave Farber <farber () cis upenn edu>]

> Date: Thu, 22 Apr 1999 09:26:47 -0700
> To: farber () cis upenn edu
> From: "Spencer E. Ante" <seante () earthlink net>
> Subject: TheStreet.com: The Bizarro World of Network Solutions
>
> Dave,
>
> Here's my take on Network Solutions'wild ride yesterday.
>
> best,
> Spencer
>
> Network Solutions: My Rivals, Show Me My Rivals
>                           By Spencer E. Ante (sante () thestreet com)
>                           Staff Reporter
>                           4/21/99 9:56 PM ET
>
>
>                    SAN FRANCISCO -- The government ends a company's
>                    monopoly on a burgeoning market. Big global
> corporations such
>                    as America Online and France Telecom (FTE:NYSE) say they'll
>                    compete against said company. The price of the
> company's core
>                    product is slashed by 20%. Sounds like a recipe for
> financial
>                    disaster, right?
>
>                    Not if said company is Network Solutions (NSOL:Nasdaq).
>                    Shares of the Herndon, Va.-based domain name company shot
>                    up $32, or 53%, to 92 Wednesday as the Internet Corporation
>                    for Assigned Names and Numbers unveiled the first
> details of
>                    the Internet's future address system.
>
>                    Welcome to the bizarro world of Network Solutions, a
> universe
>                    where news and stock price seem to move independently of
>                    each other. There are a whole tangle of reasons why the
> stock
>                    rallied on this news, but the main explanation from
> analysts and
>                    investors comes down to this: ICANN's announcements have
>                    lifted the cloud of uncertainty that's been hanging
> over the stock
>                    for months. As of Tuesday's close, those concerns had
> driven
>                    the stock down 61% from its record high of 153 3/4 on
> March 22.
>
>                    The highlights: ICANN Wednesday revealed the identity
> of the
>                    first five companies selected to compete against Network
>                    Solutions in a two-month test phase starting April 26.
> The Fab
>                    Five include AOL, France Telecom's Oleane, Internet
> Council of
>                    Registrars, Melbourne IT and register.com. Twenty-nine
> other
>                    competitors, including AT&T (T:NYSE), are set to begin
> selling
>                    registration services after the test phase ends on June
> 24.
>
>                    ICANN also said the government has reached an interim
>                    agreement with Network Solutions on two critical
> pricing issues
>                    that could have delayed the onset of competition.
> First, Network
>                    Solutions will charge the competing registrars a $9 fee
> for each
>                    domain name that it enters into the registry database.
> Secondly,
>                    registrars must pay a one-time $10,000 fee to Network
> Solutions
>                    to license the software that the company developed to allow
>                    access to the shared-registration system.
>
>                    "The news has been out and now it's over with," says Stuart
>                    Rudick, general partner with money management firm Mindful
>                    Partners, which has been long Network Solutions since the
>                    company went public. "Now we know who the competition
> is. Let
>                    the games begin."
>
>
>
>                    Stephen Sigmond, an analyst with Dain Rauscher Wessels,
>                    agrees the bad news was already reflected in the company's
>                    stock price. "Having that uncertainty reduced helps you
> establish
>                    an economic model," he says. Sigmond, who maintains a
>                    buy-aggressive rating on the stock with a $95 price
> target, says,
>                    "there is still upside on this stock." Dain Rauscher
> Wessels
>                    maintains no underwriting relationship with Network
> Solutions,
>                    but is a market maker for the stock.
>
>                    Sigmond also breathed a sigh of relief over the $9
> registry fee.
>                    "Nine dollars was a lot better than some of the
> assumptions that
>                    other folks were making," says Sigmond. While Network
>                    Solutions didn't get the $16 price they were seeking,
> Sigmond
>                    notes that the company got more than the $1 to $3
> figure that
>                    many investors feared.
>
>                    Adding to the stock's rebound today, short sellers who
> had been
>                    selling the stock bought shares to close out their
> positions.
>                    Asked if there was a short squeeze going on, Mark Zinn,
> a trader
>                    with hedge fund Charter Capital, yelped, "God, man
> there is. I'm
>                    one of them." Zinn said short sellers were carefully
> watching the
>                    stock's price this morning when the news broke just
> after 10 a.m.
>                    EST. "As soon as the news came out and it didn't sell
> off, the
>                    stock took off," explained Zinn. "That was the end of it."
>
>                    Network Solutions' stock was also helped by a general
> surge in
>                    Internet stocks. "A lot of people who trade on momentum
> were
>                    buying the stock, and that feeds on it," says Zinn.
> "The run-up is
>                    not a validation of their business model."
>
>                    Others maintain the company is a solid long-term
> investment.
>                    Defenders point to Network Solutions' distribution
> agreements
>                    with more than 170 partners and 5,000 affiliated Web
> sites, their
>                    seven years of expertise in the field and a growing
> market that
>                    will offset any losses caused by competition.
>
>                    "These guys are so far ahead of everyone else and this
> is their
>                    focus," says Rudick. "It's a huge business growing by
> leaps and
>                    bounds. So instead of growing 180% they'll grow 150%."
>
>                    Lingering Questions
>
>                    Still, a few financial question marks cloud the future
> of the
>                    company. Network Solutions has been without a CEO for 156
>                    days and counting. There is also some risk that the $9
> registry
>                    fee may be reduced after the 60-day test period. Plus, new
>                    competition on the registrar side could cut overall
> prices further.
>                    And even though Network Solutions will continue to
> maintain the
>                    root database of registered domain names, it's unclear
> whether
>                    the company will control it after its contract with the
> government
>                    expires in September, 2000.
>
>                    "The registry may ultimately some day go to another
>                    organization," says Sigmond. Many ICANN supporters
> think the
>                    registry function should be handed over to non-profit
> entity, but
>                    Sigmond says that's far from certain. "ICANN is worried
> about the
>                    Net crashing to a halt," he says. "I'm not sure who else is
>                    capable of handling the registry."
>
>                    The database is a key element of Network Solutions'
> business
>                    model. On April 19 the company announced its intention to
>                    launch in June a .com directory for businesses, or a
> sort of
>                    Yellow Pages online, based on the 4 million names it has
>                    already collected in the database.
>
>                    Also lost in the fray is the fact that Network
> Solutions is set to
>                    report its earnings Thursday. The First Call consensus
> of 11
>                    analysts calls for a profit of 12 cents per share, up
> from 7 cents
>                    in the same quarter last year and 11 cents last
> quarter. Some,
>                    including BancBoston Robertson Stephens analyst Keith
>                    Benjamin, expect Network Solutions to beat the Street's
>                    estimates.