When 1999 turned to 2000 -- and predictions of a global catastrophe caused by the Y2K bug passed -- the Internet changed. Broadband access became more widely available, and the medium became a worldwide platform for conducting business.
The new Internet created a dividing line. Everything that came before suddenly became old hat, including EarthLink (Nasdaq: ELNK) and peers such as AOL (NYSE: AOL) and United Online, which made fortunes for being among the first national Internet Service Providers.
Not so much today. Like the steel mills of the industrial Midwest, EarthLink's infrastructure for serving webpages and email is ancient and slowly crumbling. Consumer services revenue has declined in each of the last five years, and is down 67% from a 2006 high of $1.14 billion. Overall revenue has remained about even over the same period, thanks to massive growth over the past year, fueled by acquisitions of smaller telecom service providers.
Hey! Old man! What's with your Internet?
Frankly, I wouldn't be writing about this company or any of its peers had it not been for a wisecrack a cashier made during a recent shopping outing with the family. When asked whether I'd like an email copy of a receipt -- a perfectly modern and green thing to do -- I gave the personal EarthLink address I've used since 1995.
Her reply? "Wow. I haven't heard that name in a loooong time." Cut to red-faced me, feeling old. Clearly I wasn't "new Internet" material in the eyes of the 20-something behind the counter.
EarthLink, AOL, and United Online, which is best known for its Juno online service, all share in being perceived as part of the old Internet. Yet two of the three -- AOL and EarthLink -- have vastly outperformed the return of the S&P 500 over the past five years.
Can EarthLink keep this up? I've serious doubts, if only because further gains will require expanding an already rich multiple. EarthLink trades for 33 times current year earnings and 39 times next year's target. The good news? Profits are expected to improve 67% in 2013.
But that's over the short term. EarthLink's long-term success depends upon beating a growing number of companies providing voice and data services using the public Internet, not the least of which is Microsoft's (Nasdaq: MSFT) Skype unit and smaller specialist 8x8 (Nasdaq: EGHT). In my view, stitching together a patchwork of loosely related businesses is a tough way to accomplish that -- and I've backed up my take with a bearish CAPScall.
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