RealTime IT News

Internet Phone Stocks Soar

Two of the fastest-rising Internet stocks in the past week belong to companies using different strategies to unite the Internet and telephones.

Both companies are coming off recent successful IPOs and each has generated a buzz among investors with news of key partnerships and alliances.

But both Net2Phone (NTOP) and Phone.com (PHCM) are in markets - Internet telephony and wireless Internet access via phone, respectively - that are in a very early stage of development. And that means higher risks.

I'll discuss Net2Phone in this column, and Phone.com on Friday.

If I were giving out a stock of the week award, the hands-down winner would be Net2Phone, which more than doubled its share price from $25.81 on Aug. 18 to $53.13 on Wednesday. That's a 106% gain, and an all-time high stock price for the IDT spinoff. (The second-best performer in that time frame was e-tailer Alloy Online, whose shares rose 49.8%.)

Net2Phone is the market leader in Internet telephony, with an estimated 30% share according to the last figures I could find. The company provides software that enables consumers with a PC-connected microphone to make calls on their computer to either a regular telephone or another computer with Net2Phone software. Revenue is derived through the telephony service on a cents-per-minute call basis.

In the nine months ended April 30, Net2Phone had $22.3 million in revenue, a 179% increase over the $8.0 million generated in the same period a year earlier.

Even before going public on July 29, Net2Phone was attracting attention and building brand name by cutting agreements with Netscape and America Online Inc. (AOL) to integrate the company's telephony software into their Internet products.

This week's surge can be credited in large part to two more deals. On Wednesday, Net2Phone announced that Sprint would test its service for international telephony calls in the Asian market. And Tuesday, PC maker Compaq said it will provide a button on its Presario computers sold in Canada, Latin America and Asia that would lead users to a Web site with Net2Phone software downloads and service information.

The attraction of Internet telephony certainly isn't quality, though that will improve over time. It's price: Having your call jump onto the Internet, travel great distances and then get back onto the public phone network, saves you money, perhaps 50% or more.

There are a number of extravagant projections about the Internet telephony market. One, from International Data Corp., forecasts the telephony market will grow from $1.1 billion in 1998 to $23.4 billion in 2003.

That means the race has barely begun, which is good and bad for Net2Phone. Good because until now competition has come primarily from VocalTec, QuarterDeck and Microsoft (MSFT); bad because telco and hardware giants such as Alcatel, Cisco Systems, Intel (through its Dialogic acquisition) and Lucent are planning telephony offerings.

With a market cap of $2.5 billion, Net2Phone is valued at about 80 times earnings. Pretty pricey, but the company has done a lot in recent months to solidify its position as telephony market leader. I see a lot of upside here, despite the entry of larger vendors into the market.

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