Stock Rises 115% -- Do Juno What I Know?

Juno Online Services shares jump when the company says it won't charge for Internet service.
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It's taken only a day for shares in Internet service provider

Juno Online Services

(JWEB)

to double in price. Too bad it could take years to find out whether a company offering free Internet access has a sustainable business model.

Shares in New York-based Juno, best known for its free email service, have climbed steeply since Monday afternoon in a delayed reaction to the company's announcement it would start offering full Internet access for free. The stock, which closed Monday at 29, was trading Tuesday afternoon around 62, up some 115%.

The move -- which puts Juno in direct competition with other free ISPs, notably

NetZero

(NZRO)

and the free service from

CMGI

(CMGI)

-controlled

AltaVista

-- is fraught with risks and won't exactly put Juno on a crash course for profitability.

But that didn't deter investors from jumping on board and talking the stock up on Internet message boards. By Tuesday afternoon, more than 22.5 million shares in Juno had changed hands, about 68 times the average daily volume. And on the

Yahoo!

message boards alone, investors had posted more than 1,000 messages about Juno since Monday evening.

Let Freedom Ring

Though the market is rewarding Juno for offering free Net access alongside the free email and for-pay Web access it already offers, the jury is still out. As

PaineWebber

research analyst James Preissler pointed out Monday, "it has yet to be proven that the free ISP business model in the U.S. could be a profitable business model." Nonetheless, Preissler Monday doubled his 12-month price target on the stock to 120 while maintaining a buy rating. PaineWebber was one of the underwriters of Juno's IPO.

ING Barings

analyst Youssef Squali, who doesn't have a rating on Juno but rates its competitor NetZero hold, says free ISPs are facing two major negatives as the market gets crowded. First, he says, the cost of customer acquisition is going to substantially increase, "which obviously is bad," he says. Second, the free ISPs will find it difficult to raise advertising rates because of the competition. His firm hasn't underwritten for either company.

Juno President and CEO Charles Ardai says the company has to meet goals in three areas for free access to work. One, it has to get telecom costs down below the current $2-per-subscriber-per-month rate. Two, the company has to boost advertising and e-commerce revenue past $2 per subscriber per month from the current 65 cents. Three, says Ardai, Juno must benefit from drawing revenue from both subscriptions and advertising, while its competitors among conventional ISPs and free ISPs usually have only one or the other.

Cash Is King. Maybe.

In the first nine months of the year, Juno lost $40.1 million, or $1.39 per share, on revenue of $33.9 million. Preissler doesn't predict profitability in his report, but estimates the company will have revenue of $280 million in 2001. Because of the new venture, he estimates Juno will lose $3.83 per share in 2000, more than double his previous estimate of a $1.73-per-share annual loss.

That said, free ISPs are likely to get a decent share of the market for some time. Squali estimates that the number of active, registered free ISP users will amount to between 15% and 25% of Internet users for some time.

Also, the ISPs aren't short on cash: Juno, for example, had $108 million in cash and cash equivalents as of the end of September. "This could be a long, drawn-out process because these guys are well-capitalized," he says. "These guys could go a couple of years before the law of economics finally catches up to them."