March 24, 1998 1:30 PM PST

Will honeymoon last for NSI?

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Network Solutions, the Internet domain name registrar, is a company that many Netizens love to hate. They have complained about its market dominance, its inconsistent billing practices, and its inadvertent role in causing a temporary disruption to the Net last July.

But investors who own stock in the company may feel differently: They're reaping big returns on the stock since it went public last September, at least for now.

Stock in NSI, as it is known, traded today at 28-3/4, just NSI stock chart shy of a 52-week high and up sharply from its initial public offering price of 18. The stock has traded as high as 29-3/8 and as low as 11-3/4 in the past 52 weeks. This year alone, the stock's return has been more than 122 percent, robust even for an Internet company.

A "honeymoon" period like this is common among many high-technology IPO stocks nowadays, but NSI faces myriad risks ahead. The chief one: It will face intense competition in the domain-name registration business, where it updates the "phone book" of the Net, as one analyst puts it.

NSI has been the exclusive registrar for second-level domain names within the ".com," ".org," ".net," and ".edu" top-level domains. But a plan to open the process to more competition already is being finalized.

For now, however, analysts who cover the stock are bullish, though there aren't many of them. The three who are listed as covering it, at J.P. Morgan Securities, PaineWebber, and Hambrecht & Quist, all have a "buy" rating on the stock.

As the Internet Stock Review summed up its outlook on NSI earlier this year: "Care to register your domain name? Now here's a company that will grow to $100 million in front of your eyes. A real comer; one of the review's favorites."

As PaineWebber analyst James Preissler put it in one of his reports: "We believe Network Solutions remains a leading investment vehicle as a pure play on the ongoing growth of the Internet." He cited a "predictable" business model, recurring revenues, and leadership in a rapidly growing market.

It also doesn't hurt that NSI, unlike most Internet companies, has been able to turn a profit. In fact, the company has surprised Wall Street with its recent quarterly earnings.

For the three months ended December 31, the company posted net profits of $1.7 million (11 cents per share), up from $126,000 (1 cent per share) for the fourth quarter of 1996. Quarterly revenue rose to $45.3 million from $18.9 million. That beat Wall Street's estimates and caused the company's stock to surge.

Last week, the stock jumped again when Hambrecht & Quist analyst James Petit predicted that the company would earn 51 cents per share on $72.7 million in revenue this year and 85 cents on $110.6 million in revenue for 1999.

"It's an interesting combination of a Web play with significant growth and profitability," Petit said. "Competition will come, but it's at least going to be a year from now" as the plan to opening domain name registration to competition is debated and finalized. (H&Q was the lead underwriter in taking the company public.)

But analysts such as Petit and the company itself acknowledge signficant risks.

As the company explained in its IPO regulatory filings, it "faces competition in the domain name registration business from registry for country codes, third-level domain name providers such as Internet access providers, and registries of (other) third-level domain name providers." It later adds telecommunications and cable companies to that list.

In addition, the company faces some legal challenges. Last week, NSI was sued in federal court in Washington by registrants who alleged that the company's role in the domain name system was the "public scandal of the decade." The company denies any such allegations.

In its regulatory filing for going public, NSI also disclosed that it had received a civil subpoena from the Justice Department in connection with an investigation to determine whether "there is, has been, or may be a violation of antitrust laws...relating to Internet registration products and services."

Undeterred by such potential obstacles, NSI is gearing up to meet the competition. In January, the company launched the first in a series of products called WorldNic services. It is meant to help small and medium-sized businesses register their names. As one executive put it at the time: "With WorldNIC, a small business can get an Internet identity, enhance its brand, and put its name out on the Internet in minutes."

It has cut prices as well. Starting April 1, Netizens will pay 30 percent less to register domain names under a plan outlined last week by NSI and the National Science Foundation. But the cut is "revenue-neutral" to NSI, analysts said, because that money had been going to a government fund.

 

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