An Investment Opinion
Armed with software and information, InfoSpace's goal is to connect mobile Internet users to a $3.6 trillion consumer retail world. In between, InfoSpace targets the $200 billion spent annually by merchants on promotions and Web-related activities. (Numbers courtesy of InfoSpace and the Kelsey Group.) InfoSpace has secured the first-mover advantage with most every major communications carrier -- including Vodafone, AT&T, BellSouth, GTE, Bell Atlantic, U S West, and 18 others -- in order to enable "m-commerce," the latest buzzword, which stands for mobile commerce.
Sound crazy? Cell phone Rule Maker Nokia (NYSE: NOK) projects one billion cell phones worldwide by 2002. Estimates are for more than half of those to be Web-enabled phones, such as the Nokia 7110. The InfoSpace vision is one of ubiquitous Web phones functioning as the critical information access tool that enables purchases, both online and, significantly, offline. InfoSpace CEO Naveen Jain, formerly a Microsoft exec, recently stated, "The market opportunity for services that use the Internet to drive additional commerce to the larger, firmly entrenched offline market is huge. More than 80% of all Internet users research products online but purchase products offline."
The key to InfoSpace's immense market opportunity is localization. Your Web phone, which sends out a signal of your current location, will allow you to be targeted with ads and promotions from local restaurants and service merchants, such as the local dry cleaners and grocery markets. InfoSpace will provide the software that makes it all run smoothly -- on any platform and any device. The company also intends to take a small cut of the transactions it enables.
It's a compelling business model, and it appears all the more compelling based on two significant competitive advantages. First, InfoSpace has gained significant momentum through a number of big-name partnerships, including deals with Microsoft (Nasdaq: MSFT) (for shared access to MSN's instant messaging), Intel (Nasdaq: INTC) (to provide services for Intel's new Web appliances), and Verisign (Nasdaq: VRSN) (for a secure wireless e-commerce platform). Second, InfoSpace owns some unique ("patent pending") technology that allows single-click instant buying. This server-based technology appears to be a huge convenience, as it automatically fills in website payment forms, eliminating the need to ever input payment or shipping information. For the time being at least, InfoSpace appears to be protected by some fairly significant barriers to entry.
With 24 carriers already on board, the company's economic model is scaling rapidly. Fourth-quarter 1999 revenues came in at $14.35 million, up 314% from the year-ago quarter. As a software company, gross margins are very high -- 87.8% in Q4, up 3.5 percentage points from the year prior. Lo and behold, InfoSpace is even profitable, scoring a pre-tax operating margin of 9.8% during the most recent quarter. No doubt, profit margins will climb rapidly as the company gains scale.
Great income statement overall, but the balance sheet is only so-so. A flow ratio of 1.50 indicates that InfoSpace is somewhat lacking in the working capital management department. That's not a horrible Flowie, but it is somewhat troubling considering that metric is up from a much better 0.88 a year ago. It should be pointed out that a somewhat unusual $11.4 million loan to an "unrelated third party" was responsible for skewing the flow ratio to the high side. Without that item and the associated interest receivable, the flow ratio drops to an excellent 0.80. But then again, that loan represents cash payment which a company in a stronger business position would've already pocketed. Great companies have the market power to demand up-front payment for their goods and services.
All told, the balance sheet weakness is really the only sore thumb that stands out in this story. Oh, well, then there's the matter of valuation. Even after InfoSpace shares crumbled 12.5% today, the company is still valued at $19.5 billion. That's 340x the run-rate revenues (Q4 revenue x 4). Obviously, the market is already onto InfoSpace's potential. Consider, however, that even at that lofty level, the stock may actually make sense if it can become the gold standard for enabling mobile commerce. I'll pass on a prediction for that outcome, but I will keep my eye on InfoSpace's financial statements in the quarters ahead to see if the story has legs.