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Wednesday, January 07, 2004 9:38:06 PM
Net2Phone's Call to Investors
The VoIP pioneer leads the pack in this emerging technology. The question now is: Can its stock maintain its winning ways?
Investors who believe that 2004 is the year that placing phone calls over the Internet finally arrives as a technology and a business -- and signs certainly point that way -- have found a place to put their money. Many are suddenly taking a lot of interest in Net2Phone (NTOP ), the most established stock in the voice-over-Internet protocol (VoIP) business. In 2003, the shares climbed more than 70%, from $4 to $7, and it kicked off 2004 with a bang, jumping 15% on Jan. 5 to close at $7.67.
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Net2Phone debuted in 1995 with a cheap service that allowed customers to call friends from their personal computers. Now it boasts by far the longest track record, the most revenues, and the largest market capitalization of any public company in the VoIP business. "If you want to make a bet on VoIP," says Ari Moses, an analyst with Blaylock & Partners, a brokerage firm that helped underwrite Net2Phone's recent $52 million secondary offering, "Net2Phone is the best pure play."
That isn't saying as much as it might seem. Even though Net2Phone deserves credit for its hard-won survivor status, it's still a very speculative stock. Investors are bidding up the shares not only because they think Net2Phone's traditional business of facilitating Internet calls for consumers and small businesses will pay off (analysts say that business has delivered some attractive growth and positive cash flow lately after years of losses). They're also betting that Net2Phone will score big with a two-year initiative to persuade cable companies to outsource their VoIP business to it.
"IDEAL FIT." The plan -- and it's far from a slam dunk -- is to get small cable companies to either license that chunk of business over to Net2Phone or agree to share some of the revenues on Internet calls with Net2Phone. In return, they could tap into Net2Phone's expertise and capital (it has a $140 million war chest) to build and run VoIP services.
Time Warner's (TWX ) cable unit recently announced plans to build its own VoIP service, as other cable giants are doing. By contrast, "we're an ideal fit for a cable operator that doesn't have the operational skill, technology, and capital to roll out telephone service in 2004," says Bryan Wiener, president of Net2Phone's traditional Internet phone calling division.
Persuading cable companies to come aboard is slow going, however. So far, Net2Phone has signed up only Liberty Cablevision of Puerto Rico, which is a subsidiary of Net2Phone's part-owner and strategic partner, Liberty Media (L ). "It's hard to think of that deal as a precursor," says Richard Klugman, an analyst with Jefferies & Co., which also helped with Net2Phone's recent secondary offering. Net2Phone has another deal in the works with Cebridge Connections, the 12th-largest cable operator in the U.S., to deploy VoIP service in select markets in Texas and Missouri.
"It's still unclear at this point whether cable companies will sign up and under what conditions they will sign up," says Klugman, who rates the stock a hold.
ROOM TO CLIMB? Analysts who are more bullish on the stock have rather modest expectations for subscriber growth in the cable-outsourcing business. And they concede that Net2Phone is likely to lose money for at least the next 18 months (and even longer if the outsourcing business really catches on, since it will then have to spend more capital building out the services). Still, they see room for the stock to climb.
Moses figures that Net2Phone should have 20,000 cable subscribers
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