Telecom investing has taken a heap of stocks to dizzying new altitudes, and up there where the air thins and conflicting information abounds, some investors take a deep breath and say: "Listen to the technology."

That investment philosophy may explain why Wall Street has been calling on Internet telcos

ITXC

(ITXC)

and

iBasis

(IBAS)

, which manage and bill Internet connections between conventional phone companies. Harnessing the Internet to carry conversations cheaply to every part of the world, especially regions underserved by conventional phone networks, carries huge potential upside, according to this thinking.

Thus, investors find themselves betting, through a pair of richly valued companies that are years from profitability, that the international Internet calling business will take off. A number of companies have fallen short of tapping this purported mother lode in the past, but ITXC and iBasis investors see these plays as putting them right where the action is.

Put Me in Coach

"I feel pretty confident this is going to be a major-league investment motif for the next year or more, as much as e-commerce is right now," says

Hoak Breedlove Wesneski

analyst John Bain, who has a buy rating on iBasis and recently put a hold on the overheated ITXC. Hoak Breedlove, a Dallas-based investment firm, has no banking ties to iBasis or ITXC.

Supporters might dub them T2T, as in international telco-to-telco wholesalers. Princeton, N.J.-based IXTC and Burlington, Mass.-based iBasis are attractive to Wall Street because they avoid the bleeding edges of the industry: They don't build networks and they don't try to market their services to the masses.

As a result, the companies have lower capital costs and stand to succeed as cheaper providers of international calling because they are unregulated and bypass the settlement fees levied against conventional calls, says

U.S. Bancorp Piper Jaffray

analyst Andrew Schroepfer, who has a strong buy on iBasis and no rating on ITXC. Piper Jaffray was a lead underwriter of iBasis' IPO.

Two for Tea

Nonetheless, the stocks' rapid run-up and the companies' lavish market capitalizations raise some eyebrows. Even after an 8% drop early Tuesday on news it would sell 4 million shares in a secondary offering, ITXC was valued at around $4 billion, despite reporting a loss of $13.6 million for the first nine months of 1999 on $14.3 million in revenue. iBasis, meanwhile, was valued at $2.52 billion; for the first nine months of 1999, iBasis reported a loss of $14.3 million on $11.8 million in revenue.

A Toast to T2T
A sharp rally in ITXC and iBasis

Source: BigCharts

At this point, Internet calling is small potatoes. The total annual minutes of all Internet calls would represent a good single day's worth of work in conventional telephone minutes. But with the economics of free Net calls, growth opportunities should be plenty in Net calling, say experts.

Worldwide, Internet calling revenue amounted to just under $1 billion last year. It's projected to grow to $1.5 billion this year and just over $4 billion in 2004, according to a report by

Insight Research, a telecommunications research firm based in Parsippany, N.J. By contrast, the U.S. long-distance market was $100 billion in 1997.

Hearing the Pin Drop

And as critics are quick to point out, a lot of promising companies that thought they had a direct line to vast fortunes in Internet telephony have instead found they've dialed "M" for misfortune.

Phone networks and the Internet speak entirely different languages, so it takes some technical backflips to carry conversations back and forth. As a result, sound quality can often suffer. And typically, it takes a fortune in advertising to coax users onto the service.

Witness the marketing exertion of consumer-targeted Internet calling providers

Net2Phone

(NTOP)

and

Deltathree.com

(DDDC)

. The two have thrown piles of cash at getting prime placements on Web portals, striking high-profile partnerships with e-tailers and giving calls away for free to gain more users. Net2Phone shares, after running to 92 shortly after the company's IPO last summer, were recently trading in the 50s.

And consider

VocalTec Communications

(VOCL)

, the Israeli company that invented Internet calling in 1995 and

holds a 16% stake in ITXC. The company floundered for years, hoping Net calling would take off. Critics say while the Internet will eventually siphon traffic off the phone network, the migration has been too slow to support these business models.

Spanning the Globe

Nonetheless, investors keep coming back to the notion that the Internet allows almost any company to become a telco, says Robert Rosenberg, president of Insight Research. Rosenberg has done no consulting for ITXC or iBasis. Not only are non-U.S. country-to-country Internet calls measured in pennies rather than dollars per minute, the cost of entry is also as dramatically cheaper. This is expected to increase call traffic and subsequently generate more cash for the wholesalers.

"A start-up in Brazil or Senegal no longer has to buy a $5 million phone switch to get into business," says Rosenberg. Instead, "they can buy a $15,000 server and get into the phone business" with Internet protocol technology.

And unlike the U.S., which has phone service available in more than 95% of all homes, the rest of the world is still coming along. "Quality is not an issue when there's no alternative," says Rosenberg.

Poor sound quality and all, investors that are listening to the technology are starting to like what they hear about the T2T Internet telephony.