RealTime IT News

Network Solutions Accused of Misleading Investors

Wall Street Friday will be keeping an eye on shares of Network Solutions to see if they can recover from Thursday's 8 percent drop.

Network Solutions (NSOL) fell after Asensio & Co. released a negative research report accusing NSI of misleading investors about its future prospects.

While NSI may call itself "the dot com people," and claim to be synonymous with the Internet, Asensio & Co. chairman Manuel Asensio said that's wishful thinking.

"Eventually the market will recognize that Network Solutions is not an Internet company. It's an electronic bureaucracy, like a license plate or driver's license bureau. There's no value added here. It's a government contractor with a contract that's about to be terminated," Asensio said in an interview.

Known on Wall Street as a self-appointed whistle blower, Asensio claims Network Solutions has "purposely disseminated misleading information, and failed to disclose material negative information" about its contract with the National Science Foundation, which expires in September of 2000.

Asensio believes that NSI stock, which closed Thursday at 101 1/16, is "grossly overvalued," and that the termination of the company's exclusive contract will lead to severe pressure on earnings.

By his estimates, NSI is currently trading at 365 times its 1998 earnings. "Even by Internet standards that's very high, and requires the assumption that the growth will accelerate. But clearly sales and cash flows won't survive, and in fact, the company many not survive in it's entirety."

New York-based Asensio & Co. is an investment boutique that has prospered by selling short the stock of companies it believes are in trouble. In a short sale, an investor borrows stock, sells the shares at the current price, and hopes to cover the loan by buying back the shares in the future at a lower price.

While nine brokerage firms currently have "buy" ratings on NSI, Asensio faults them for what he calls "preposterous and weak assumptions" that the domain name market will continue to have wide margins and rapid growth, and is unattractive to other competitors.

Internet.com senior investment analyst Steve Harmon said analysts who follow NSI are well aware that competition is looming for the big domain registrar. But Harmon believes that the seven years of its monopoly have positioned it well.

"The key advantage I've seen is NSI's current footprint, with the installed base of domains it's already signed up and the momentum it has in the branding and the ability to execute orders. Having a lead in time and a critical mass goes a long way on the Internet," according to Harmon.

Network Solutions Thursday denied Asensio's claims that it misled investors or withheld information. The company said Asensio's report contained a number of inaccuracies, and it noted that Asensio has never spoken with Network Solutions management.

Separately, NSI Thursday announced that it has signed up 5,000 members to its affiliates program. Participating sites create a link to NSI's site in exchange for a referral fee that's a percentage of each domain registration sold.