eMailbag Monday: Net2Phone, Hoover’s and Infospace

Certainly you saw the Net2phone IPO. But did you see what happened to
IDT, the parent which owns 57% of Net2phone? Is it typical for spinoffs
to be worth more than their parents when the parent retains a majority?
The only other example I know of is ZDNET — there the parent is still
worth more than the Internet spin off.
–Louis

Reply: It certainly isn’t typical for a spinoff to be worth more than
its parent company, but the high valuations of publicly traded Internet
companies and the volatility of the Internet stock market make it far
more likely.

Look at the respective valuations of Net2Phone and telecom IDT since
July 29, when NTOP went public. Net2Phone finished the day at $26.56,
or 77% above the offer price, giving it a market cap of $1.26 billion.
IDT, meanwhile, fell 10% that day to finish at $18.63, equaling a market
cap of $633 million.

Since then both stocks have lost ground, with Net2Phone plunging 38%,
giving it a market cap through Friday of $783 million, while IDT fell
16%, leaving it valued at $531 million. So in six trading days,
Net2Phone went from having a market cap of roughly double IDT’s to one
that is only 47% higher. That’s volatility.

Earnings Enigma
I follow the ISDEX components pretty closely, trying to gain some
knowledge along the way. But often, I
just don’t understand some market reactions. For example, on 7/27,
Infospace (INSP) posted a profit
of $409,000, or a penny a share, which topped the consensus Wall Street
expectation of a 4 cents per share loss. But for some reason, the market
reacted negatively, and INSP dropped approximately 5 points. How is this
possible?
–Rich

Reply: It is the work of poltergeists. Seriously, there were a number of
companies that failed to get a boost out of impressive earnings in the
latest reporting period. In fact, on the same day Infospace.com
announced earnings, eBay also beat analysts’ expectations and lost
$4.81. Yahoo! is another major ISDEX company that couldn’t convert good
quarterly numbers into share gains.

Often news about or from a specific company is overwhelmed by larger
forces that dominate the market. The selloff of Internet stocks that
began about the second week of July has rendered irrelevant positive
catalysts that normally would drive up prices of individual stocks, and
sometimes even stocks across a sector. It’s hard to sail into the wind
when it’s a hurricane. That’s why many companies won’t release positive
news (customer wins, etc.) during a steep market slide: It won’t help.
They’d rather ride out the storm, wait until the market turns and then
use the momentum.

Hoover’s In a Crowded Market
Just wondering what you think about Hoover’s as a company? Thanks for
the feedback. Great site. Keep up the good work.
–Thomas Horn

Reply: Hoover’s has a lot going for it, including a strong brand name
among people who buy and sell stocks, especially online. It’s
www.hoovers.com Web site is a must-stop for thousands of investors
seeking research, data and information on public companies. It is
especially useful for investors researching IPOs.

But the online financial information and services market is
hyper-competitive, containing numerous “name” players such as The Wall
Street Journal
, Dun & Bradstreet, Standard & Poor’s, Dow Jones,
Bloomberg Business News, CBS MarketWatch.com and internet.com’s Internet
Stock Report. Portal giants such as AOL and Yahoo! also offer an
impressive array of financial news and information.

Hoover’s reported revenue of $9.2 million in the fiscal year ended in
March, against a net loss of $2.3 million. There are many Internet
companies out there with much lower revenue and higher net losses,
though Hoover’s 79% annual revenue growth rate isn’t exactly inspiring.
In fact, the Hoover’s Q1 2000 earnings report released last week shows
$3.2 in revenue, barely above the $3.1 million in the previous quarter.
Some of that is seasonal; however, this early in a market, there’s
tremendous pressure on companies to show continual strong revenue
growth.

I suspect Hoover’s will have problems doing that. Consequently, I see a
larger company eventually buying Hoover’s to augment their own financial
information offerings.


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