NetZero Won't Be Going Anywhere Soon By S.P. Brown

It's all in the timing. Last fall, NetZero (NZRO) was fortunate enough to go public during the apex of IPO mania. The free Internet service provider hit the market in late September at $16 per share. However, once trading actually began, its shares nearly doubled to $27.75.

This investor love affair with all things new raged through February, during which time NetZero saw its shares rise to $40. Soon after, though, the bloom wilted and many of last year's hot IPOs found themselves as popular as David Duke at a B'nai B'rith gathering.

From $40 per share, the company's stock tumbled to a low of $5 as recently as April 17. Since then, its mildly recovered to around $9 per share.

The recovery was spurred by better-than-expected quarterly earnings. NetZero posted a third-quarter loss of $24.9 million, or $0.27 per share. A First Call survey predicted a lose of $0.30 per share.

Revenues during the quarter totaled $16.9 million, soaring 2,059 percent from $781,000 in the same year-ago period. Moreover, the company said it added more than 1 million registered users, bringing its total registered-user base to more than 4 million.

Also contributing to the recovery was telecom equipment maker Qualcomm (QCOM), which recently purchased a 10 percent stake in NetZero for $144 million, elevating the company's cash horde to $280 million. According to NetZero chief executive Mark Goldston, the company's monthly cash burn rate averages $7.25 million. Needless to say, the Qualcomm investment has bought the ISP additional time, which is becoming a rare commodity.

It's time NetZero will surely need. Since going public last year, free ISP competition has intensified dramatically. In fact, over the past six months every major Internet portal has entered the fray.

If that weren't discouraging enough, the guys who actually charge for the service haven't been hurt by the ISP freebies. In its most recent quarter, America Online (AOL) boosted its membership 36 percent over the same year-ago quarter. The ISP giant now sports a membership base well in excess of 20 million. On top of that, the company actually makes money.

However, thanks to Qualcomm, NetZero now has enough cash on hand to become profitable, according to CEO Goldston.

I'm not so sure. Free ISP service is becoming as readily available as free e-mail service, and the competition is likely to intensify as more brick-and-mortar companies take to the service as a marketing tool. Already, discount retailer Kmart (KM) has partnered with portal king Yahoo! (YHOO) to provide free ISP service, as has Ace Hardware with Iwon.com.

And get this, when surfing in Yahoo or Iwon, that annoying little banner ad disappears.

One final thought. A lot of Internet company executives are quick to boast about their cash hoards and burn rates, despite demonstrating little ability to replenish that cash. Incredibly, many investors will invest in what amounts to a wasting asset that isn't "wasting" by returning cash directly to investors, i.e. a royalty trust.

With that said, I'm "burning" through my cash balance at a much slower rate than NetZero and many of the other free ISPs. If anyone wishes to invest in my cash balance at a multiple I deem appropriate, I'd be more than willing to sell shares.