While Godzilla thunders through Manhattan on the silver screen, just down the block on Wall Street investors created their own leaping lizard when Verio went public on May 12 and reached for the sky. After pricing at $23 and scraping $30, however, VRIO shares found that gravity matters more than size, lizard jokes not-withstanding.
Even after the fall VRIO trades north of 10x annualized revenue, which seems high based on our thinking that Verio has dozens of regional ISPs it must manage, which may translate into thinner margins. Yes, investors applaud the buy, but VRIO trading at a premium to the group seems out of line and probably ahead of itself thanks to the IPO fever.
Beyond Verio, we wondered what the other ISPs looked like in the latest action adventure flickering across the investscape, with scores of access firms building out fiber and placing debt loads that only a year ago may have been unheard of. Just like a reprise of that old Tokyo lizard, ISPs are back. But what are they worth?
Before we go on, take a look at how these top ISPs compare in our latest analysis:
Dialing & Dedication For Dollars
ISP | PSINet | Verio | Concentric | Earthlink | Mindspring | ||
Ticker | PSIX | VRIO | CNCX | ELNK | MSPG | TOTAL | AVERAGE |
Market | $ | $ | $ | $ | $ | $ | $ |
Current | $ | $ | $ | $ | $ | $ | $ |
Current | $ | $ | $ | $ | $ | $ | $ |
Working | $ | $ | $ | $ | $ | $ | $ |
Long-term | $ | $ | $ | $ | $ | $ | $ |
Enterprise value | $ | $ | $ | $ | $ | $ | $ |
Latest | $ | $ | $ | $ | $ | $ | $ |
Annualized | $ | $ | $ | $ | $ | $ | $ |
Revenue multiple | 6.62 | 10.05 | 9.41 | 5.49 | 5.54 | 37.11 | 7.42 |
Accounts | 0.033 | 0.100 | NA | 0.680 | 0.341 | 1.15 | 0.29 |
Value/subscriber | $ | $ | $ | $ | $ | $ | |
| (c) 1998 Mecklermedia, Internet Stock Report | |||||||
Our tweaking of the numbers of PSINet (NASDAQ:PSIX) shows, for example, that if you look at it on a value per account basis the number soars past $30,000. But these are corporate accounts, each paying for dedicated access many times over what a dial-up customer pays. There’s more value inside the numbers also as PSI keeps about 80% of its clients vs. as high as 50% churn at major ISPs.
With its $600 million debt placement and fiber deals running across the U.S., PSI may be one of the least understood ISP players. Fully valued? $1 billion market cap. Recall when UUNET was sold to MSF at $2 billion in early 1996. It seemed like an enormous sum then for an ISP. Now we estimate UUNET (part of $46 billion market cap WorldCom -NASDAQ:WCOM) could be fully 15% of WCOM value if sold off in pieces.
Concentric (NASDAQ:CNCX) focused on the corporate customer and virtual private networks (VPNs) when few understood the alphabet soup and how it would affect corporate margins. Quite simply, VPNs allow a company to use the Internet as its own secure (or more secure) communications network, whereas in the past that meant high-cost. Now it’s leverage the infrastructure of the Web and reap the savings. VPNs could be huge in our view.
Meanwhile, Earthlink (NASDAQ:ELNK) just closed its deal with Sprint whereby the phone giant pays it $24 million, extends it $100 million credit, and feeds it 150,000 new subs for 5 years. On top of that, Sprint markets and provides some network support. It now owns 28% of ELNK. It’s also on the way to sell 1.5 million shares and cash up for the battle ahead with AOL and Mindspring.
Despite being consumer focused, Earthlink, which also has a business hosting division that’s very active, could be a meaningful dual player in dedicated and dial up access.
Mindspring (NASDAQ:MSPG) used to run neck-in-neck with ELNK in market cap but the Sprint deal pushed ELNK out ahead. MSPG just completed a 1 million share offer which we reflect in its working capital (as we do with ELNK’s proposed offer, assuming current stock prices hold).
Given its relatively small long-term debt and positive earnings ability, MSPG is perhaps the most undervalued relative to the group shown. Almost. Earthlink’s Sprint link and new 150,000 new subs don’t appear to be discounted ahead in ELNK’s value in our view.
ELNK’s current subs at MSPG’s value implies ELNK at $945 million enterprise valuation. Even so, Mindspring looks like a very attractive player in this space, and a telco could be looking over the way Sprint phoned in the deal with Earthlink. Mindspring has been aggressive in the acquisition space, just like Verio. And yet VRIO market cap is 42% higher than MSPG?
Godzilla or not, the ISP that ate Wall Street may emerge in this Mindspring in particular.
