Network Solutions: My Rivals, Show Me My Rivals

The news of competition that Network Solutions investors had been dreading is finally out. So why is the stock rallying?
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SAN FRANCISCO -- The government ends a company's monopoly on a burgeoning market. Big global corporations such as America Online and France Telecom (FTE) say they'll compete against said company. The price of the company's core product is slashed by 20%. Sounds like a recipe for financial disaster, right?

Not if said company is

Network Solutions

(NSOL)

. Shares of the Herndon, Va.-based domain name company shot up $32, or 53%, to 92 Wednesday as the

Internet Corporation for Assigned Names and Numbers

unveiled the first details of the Internet's future address system.

Welcome to the bizarro world of Network Solutions, a universe where news and stock price seem to move independently of each other. There are a whole tangle of reasons why the stock rallied on this news, but the main explanation from analysts and investors comes down to this: ICANN's announcements have lifted the cloud of uncertainty that's been hanging over the stock for months. As of Tuesday's close, those concerns had driven the stock down 61% from its record high of 153 3/4 on March 22.

The highlights: ICANN Wednesday revealed the identity of the first five companies selected to compete against Network Solutions in a two-month test phase starting April 26. The Fab Five include AOL, France Telecom's

Oleane

,

Internet Council of Registrars

,

Melbourne IT

and

register.com

. Twenty-nine other competitors, including

AT&T

(T) - Get Report

, are set to begin selling registration services after the test phase ends on June 24.

ICANN also said the government has reached an interim agreement with Network Solutions on two critical pricing issues that could have delayed the onset of competition. First, Network Solutions will charge the competing registrars a $9 fee for each domain name that it enters into the registry database. Secondly, registrars must pay a one-time $10,000 fee to Network Solutions to license the software that the company developed to allow access to the shared-registration system.

"The news has been out and now it's over with," says Stuart Rudick, general partner with money management firm

Mindful Partners

, which has been long Network Solutions since the company went public. "Now we know who the competition is. Let the games begin."

Stephen Sigmond, an analyst with

Dain Rauscher Wessels

, agrees the bad news was already reflected in the company's stock price. "Having that uncertainty reduced helps you establish an economic model," he says. Sigmond, who maintains a buy-aggressive rating on the stock with a $95 price target, says, "there is still upside on this stock." Dain Rauscher Wessels maintains no underwriting relationship with Network Solutions, but is a market maker for the stock.

Sigmond also breathed a sigh of relief over the $9 registry fee. "Nine dollars was a lot better than some of the assumptions that other folks were making," says Sigmond. While Network Solutions didn't get the $16 price they were seeking, Sigmond notes that the company got more than the $1 to $3 figure that many investors feared.

Adding to the stock's rebound today, short sellers who had been selling the stock bought shares to close out their positions. Asked if there was a short squeeze going on, Mark Zinn, a trader with hedge fund

Charter Capital

, yelped, "God, man there is. I'm one of them." Zinn said short sellers were carefully watching the stock's price this morning when the news broke just after 10 a.m. EST. "As soon as the news came out and it didn't sell off, the stock took off," explained Zinn. "That was the end of it."

Network Solutions' stock was also helped by a general surge in Internet stocks. "A lot of people who trade on momentum were buying the stock, and that feeds on it," says Zinn. "The run-up is not a validation of their business model."

Others maintain the company is a solid long-term investment. Defenders point to Network Solutions' distribution agreements with more than 170 partners and 5,000 affiliated Web sites, their seven years of expertise in the field and a growing market that will offset any losses caused by competition.

"These guys are so far ahead of everyone else and this is their focus," says Rudick. "It's a huge business growing by leaps and bounds. So instead of growing 180% they'll grow 150%."

Lingering Questions

Still, a few financial question marks cloud the future of the company. Network Solutions has been without a CEO for 156 days and counting. There is also some risk that the $9 registry fee may be reduced after the 60-day test period. Plus, new competition on the registrar side could cut overall prices further. And even though Network Solutions will continue to maintain the root database of registered domain names, it's unclear whether the company will control it after its contract with the government expires in September, 2000.

"The registry may ultimately some day go to another organization," says Sigmond. Many ICANN supporters think the registry function should be handed over to non-profit entity, but Sigmond says that's far from certain. "ICANN is worried about the Net crashing to a halt," he says. "I'm not sure who else is capable of handling the registry."

The database is a key element of Network Solutions' business model. On April 19 the company announced its intention to launch in June a .com directory for businesses, or a sort of Yellow Pages online, based on the 4 million names it has already collected in the database.

Also lost in the fray is the fact that Network Solutions is set to report its earnings Thursday. The

First Call

consensus of 11 analysts calls for a profit of 12 cents per share, up from 7 cents in the same quarter last year and 11 cents last quarter. Some, including

BancBoston Robertson Stephens

analyst Keith Benjamin, expect Network Solutions to beat the Street's estimates.