NetZero Skyrockets After Qualcomm Buys Stake

The purchase suggests Qualcomm supports NetZero as a business model for free Internet service.
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Updated from 10:17 a.m. EDT

Shares in free Internet access provider

NetZero

(NZRO)

jumped 43% in early trading Monday after wireless communications giant

Qualcomm

(QCOM) - Get Report

said it would acquire a 10% stake in it for $144 million.

NetZero was trading at 11 13/16, up 3 13/32 on buying that helped reverse a decline that had sapped 70% of the stock's price this year. (NetZero closed up 3 5/32, or 38%, at 11 7/16.)

Qualcomm sagged 6 13/16, or 6%, to 102 11/16. (Qualcomm closed down 9 7/8, or 9%, at 99 5/8.)

San Diego-based Qualcomm said it will come to the aid of the self-proclaimed "defenders of the free world" and buy about 11.5 million shares of NetZero. The move suggested Qualcomm supports NetZero as a business model for free Internet service.

"It positions them

NetZero well for the coming world of the Internet appliances and personal digital assistants," said Paul Noglows, an analyst with

Chase H&Q

, who rates the stock a buy and was involved with underwriting the IPO. "Also, I think this says that they're not going to have to come back to the market for a second round of financing."

Some analysts and investors had thought NetZero would have to return to the public to raise more money to sustain operations through a secondary stock offering. A secondary offering after a prolonged stock fall is often seen on Wall Street as a last-ditch effort to revitalize a company as the process dilutes the value of existing falling shares and signals cash flow weakness.

Noglows said the decline in NetZero's stock is largely attributable to a matter of perception from investors that these kinds of companies will never turn a profit. "I think there is a clear path to profitability for NetZero," he said. "This is a very significant deal for the company."

ING Barings

also applauded the deal and upgraded NetZero to buy from a hold rating Monday morning.

NetZero was one of the first businesses to attempt to give away Internet access in hopes of building a large base of customers that would be attractive to advertisers.

NetZero, based in West Lake, Calif., has brought in more than 3.7 million customers since it came public last October, but has been spending substantial sums on sales and marketing to build its own brand. NetZero, though, remains well ahead of its competitors

1stUp.com

and

Freei

in registered users of free Internet access.

"The next step in our evolution involves executing on our vision to become a leading provider of universal Internet access across a wide range of connectivity platforms, including narrow band dial-up, high-speed wireless, broadband and cellular," said Mark Goldston, chairman and chief executive officer of NetZero. "NetZero's goal is to provide its subscribers access to the Internet, allowing them to navigate and receive email across a variety of devices, including laptop and desktop computers, Internet appliances, mobile phones and personal digital assistants.''

Paul Jacobs, executive vice president of Qualcomm, said in a statement that the company will immediately benefit from NetZero's distribution of Qualcomm's e-mail server, Eudora, as its preferred e-mail software program.