Jupiter Looms Large After IPO Richard McCaffery (TMF Gibson)
October 8, 1999
Whose research do you think all those hot Internet stocks use to pitch investment bankers, anyway?
Internet research firm Jupiter Communications (Nasdaq: JPTR) sold its first shares to the public today at $21 a pop, and shareholders watched as the price doubled by early afternoon.
That gave the New York-based company a market value of around $120 million. Investment bank Donaldson, Lufkin & Jenrette (NYSE: DLJ) initially priced the IPO in the $15 to $17 range, boosted it to $18 to $20 yesterday, then sat back as Internet euphoria sent the shares flying.
One thing refreshing about Jupiter: It's easy for investors to understand what the company does. Jupiter spots Internet trends, makes market forecasts, and offers research-oriented seminars and conferences.
It forecasts, for example, that online holiday sales will double to $6 billion in 1999, and skyrocket to $78 billion by 2003. It predicts that kids and teenagers will spend $1.3 billion online in 2002, and that the online travel industry will hit $17 billion by 2003. This is great stuff, the kind of information reporters, researchers, executives, and bankers rely on to pick winning companies, products, and strategies.
Founded in 1994, Jupiter focuses on Internet commerce. The company's flagship offering is an online subscription product called Strategic Planning Services, which details the fast-changing world of Internet technology. Clients subscribe to one or more of the company's SPS offerings, which include monthly reports, weekly notes, an online library, and other detailed services.
Its revenue is growing fast. As of June 30, the company had 654 SPS clients, up from 421 in December 1998 and 145 in December 1997. Jupiter had $14.8 million in 1998 sales, and made $14.4 million in just the first six months of 1999. It's still an Internet company, however, and hasn't made a profit. Last year it lost $2.1 million. It managed to trim losses in the first six months of 1999 to just $130,000.
Losses are understandable for a start-up company in a new industry. Every fast-growing company balances the need to grab market share against near-term profitability.
But no one escapes at least a cursory cash flow statement analysis. On that point, Jupiter is cash flow positive for the first half of 1999 to the tune of about $3.2 million. This is largely due to an increase in deferred revenue, which represents money paid in advance for services like SPS, and is very common in the subscription business. However, it's the first time the company has been cash flow positive since 1996.
Accounts receivable were up 85% from December to June, which is pretty good for a company that grew sales 143% in the first six months of the year. Still, accounts receivable have been a big reason the company hasn't been cash flow positive historically, and investors should watch to make sure the company is balancing fast growth with strong asset management. Jupiter lists no long-term debt on its balance sheet.
Thanks to a sparkling debut, Jupiter is trading at about the same price as one of its competitors, Forrester Research (Nasdaq: FORR), a market research firm that's done very well for itself. Revenue and net income at the Cambridge, Massachusetts company grew 52% and 34.8%, respectively, compared to the same period a year ago. The company has an attractive profit margin of 12.2%, no long-term debt, and has been increasingly cash flow positive over the last three years.
A second rival, the widely known Gartner Group (NYSE: IT), is Jupiter's largest shareholder with a 28% stake. Gartner is expected to compete directly against Jupiter with its Internet commerce products. In addition, Gartner has the right to appoint two of Jupiter's board members, according to the prospectus, which states specifically that Gartner could use its voting power to negatively affect Jupiter. That could make things tough for the company's shareholders.
No question the market opportunity is huge. According to Jupiter's prospectus, the Organization for Economic Cooperation and Development projects that Internet commerce will hit $1 trillion in revenue by 2005. The company is smart enough to have specialized exclusively on Internet commerce, a single-mindedness that makes analysis easier for investors.
Even though Jupiter's market research has gained a solid reputation, it still lacks Forrester's track record of profitability, especially in terms of operational cash flow. Investors might want to wait until Jupiter demonstrates a consistent ability to generate cash before deciding it's the better investment.