High Hopes for InfoSpace

In yesterday's report, I encouraged us to think of InfoSpace (Nasdaq: INSP) as the top dog and first-mover in the "everywhere-to-everywhere digital activity" industry. Does that sound like an industry? I'm still scratching my head at my own language there, but I have to blame InfoSpace for doing that to me.

As I've written in our 1999 book Rule Breakers, Rule Makers (my personal favorite of the books we've written, though I enjoyed writing them all), companies that defy a traditional industry classification are often providing you an early indicator that they're jaunty, strutting Rule Breakers. InfoSpace is one of them. How do you assemble the language necessary, fetch up des bons mots, when you're trying to describe a business that is taking numerous many-angled licks off of the proverbial e-commerce ice cream cone? If you'll recall the brief subway example in yesterday's report, you know what I mean. If you don't recall it... what are you, some two-timin' once-a-month-or-so visitor? Get Foolish! (And don't miss those freebies!)

So, how do others describe this company? Well, in his Motley Fool Research Internet Report on the wireless Web, analyst Paul Larson calls InfoSpace "a portal's portal." That's apt. In the context of the wireless world, Paul views the company as a "wireless application service provider" (WASP). Paul sees InfoSpace as the early leader of the WASPs.

How does Matt Tompkins (Y2Krash), author of the best-selling series of reports Ten Companies That Will Rule the World over at Soapbox.com characterize InfoSpace? He contends that Infospace is in the process of "becoming one of the most dominant and profitable forces in the online universe."

Similarly high hopes are already built into the stock price, obviously. As we discussed yesterday, the company has no profits at present and a price-to-sales ratio exceeding 140. If you took the time to read a Rule Breaker run-through-the-rings that fellow Fool Matt Mick (mmick) gave the company in this posting that I discussed yesterday, you'll notice that he ended his January surmisings with this line: "Current market cap of $13 billion and a potential to be 5 times that high."

As of this writing, eight months later, its market cap is just $9.4 billion, and yet most of the company's operations and strategic moves this year (including its agreement to merge with Go2Net, which gets a good treatment on Tech Advisor's Soapbox discussion board, have gone well. And, yet, the stock is down from a high of $138.50.

Perhaps this points to a repeat cycle we've seen in biotechnology, Internet, etc., which is that new technologies can get dramatically overvalued in the short term, while still remaining (for Fools) dramatically undervalued for the long term. Long-term shareholders of Amgen (Nasdaq: AMGN), for instance, would be nodding their heads about now.

Sustainable advantage
By dint of sheer momentum and now its increasing heft, InfoSpace grades out for me as (yes, indeedy) having a 2-3 year sustainable advantage. I don't see anyone invading 'Space's space to a truly harmful degree for at least two years, and it is hard to project this industry much past that.

The company has solid deals with all the regional Bells as well as a host of international phone companies. One of our own resident wireless aficionados, Keith Pelczarski (TMF Czar), suggested to me that InfoSpace's biggest competitive enemy could wind up being its own partners, should the Bells ever "wake up" and decide that they can and want to provide all these services themselves, rather than outsourcing to InfoSpace. Keep your eyes peeled.

Further, cast a frequent eye on NTT DoCoMo over in Japan, whose "i-mode" product is catching on in a gargantuan way with Japanese consumers who happily pay premium monthly bills for Net access via their cell phones. For more on DoCoMo, see this discussion board post. The company is inking numerous worldwide agreements and is already undoubtedly a major long-term global player in terms of offering Internet service to cell phones.

From an InfoSpacecentric (what a word) standpoint, though, InfoSpace continues to work to support numerous different platforms, standards, and devices, of which i-mode may be just another.

Excellent past price appreciation
This third attribute of Rule Breakers requires that a company sport relative strength of 90 or higher, indicating excellent stock performance over the past 12 months. As of this writing, that figure stands at 97, meaning that InfoSpace has outperformed 97% of all other U.S. stocks over the last year, enroute to more than tripling. The past six months have been very poor, of course.

Good management, and smart backing
The backing for this company doesn't matter so much to me at this point, as it's well past having to rely on venture capitalists. Given that investor Paul Allen owns a few dozen percentage points of Go2Net (InfoSpace's merger partner), InfoSpace will now have Allen on the team bus. Founder and CEO Naveen Jain, whose successful career at Microsoft inspired him to go on to do his own thing with InfoSpace, appears to be rather a card. I have never met him, but if you take the time to read this take on Jain, you'll get the idea. It was written upon his being named one of Red Herring magazine's top 20 Entrepreneurs of the Year for 1997. (Quite a "graduating class" that year, with Jeff Bezos included.)

Draw your own conclusions. For me, I'm generally happy to see the original founder of a company play an active long-term role in it.

A developing household brand?
I believe InfoSpace has good potential to make its name known to the world. As a brand aficionado, I intuitively like the name, and further, its business model depends on ubiquity (and eventual consumer recognition, methinks). Also, good move dropping the "dot-com" from the company name. I'm admittedly snobby this way, having myself co-founded a company that resisted ever "dot-comming" itself, but I'm glad to see management say, "We are bigger than 'dot com.'" InfoSpace can and should stand on its own.

These things said, the company is not at present a well-known brand, and has built a large portion of its sales on private labeling. So, you have to dream a bit to see InfoSpace one day as a household brand.

"Overvalued"
Short-sellers' spokesman Herb Greenberg of TheStreet.com has called it overvalued. Given the price-to-sales ratio that I've highlighted in my analysis, you already knew that this stock is high up on some people's short-sell lists. And it's been a good pick, because InfoSpace has gotten drubbed throughout most of the year 2000. They're right that it's an expensive stock even at this level, but I actually view the high price as confirming InfoSpace's prospects, not as a reason to avoid it.

I'd love to hear more thoughts from any of you at our InfoSpace discussion board, where you can also pose any questions you have for the many knowledgeable industry enthusiasts on that board.

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