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2HRS2GO: Jupiter steadiness doesn&#039t translate to Web market cap

I wonder how Jupiter Communications (Nasdaq: JPTR) decided whose research to cite in its own prospectus.

Along with Forrester Research, Jupiter ranks among the most-quoted market research firms in Internet IPO prospectuses. Now the company has made its own entrance into the world of public trading, with successful results so far: shares climbed as much as 126 percent this morning, an especially impressive performance considering seven other companies also debuted on the Nasdaq today.



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For its own IPO filings, Jupiter decided to sidestep competitors entirely and use academic studies to frame the view of its market opportunity:

"A recent report by the University of Texas' Center for Research in Electronic Commerce estimated that the Internet economy generated approximately $300 billion in U.S. revenue and was responsible for 1.2 million jobs in 1998. A recent study by the Organization for Economic Cooperation and Development predicted that worldwide Internet commerce will grow to $1 trillion by 2005. In addition, billion dollar markets are emerging on the Internet for many different industry sectors. Specifically, for the U.S. we project that by 2003 the online travel industry will grow to approximately $17 billion, online advertising will grow to approximately $12 billion, overall consumer online shopping will grow to approximately $43 billion and that total assets held in online brokerage accounts will grow to approximately $3 trillion."

I didn't think you could find that many "illion" suffixes in one paragraph anywhere outside of U.S. federal budget documents.

Too bad those market research numbers can't be transplanted directly into Jupiter's income statements, which sort of resemble financials of the companies that buy its research. Only sort of -- unlike some (many?) of its customers, Jupiter generally seems to be on a trend toward consistent profitability. The company actually made money in the April-June period, one of only two profitable quarters in the last year and a half. Gross margins rose in each of the last six quarters, while sales and marketing costs and G&A have remained within the same range.

Quipping about financials aside, Jupiter's prospectus looks much cleaner that those of most Web-related offerings. The "Risk Factors" section is mostly devoid of beyond the generic headings. Even some of those are watered down: instead of the usual "losses will continue" you have "may continue" (Read: We don't expect them to continue); under competitors, you have only one, Forrester, although there's a caveat: Jupiter's largest shareholder, IT research firm Gartner Communications, plans to become a direct rival. Should make for interesting Jupiter board meetings).

Jupiter's business model, being somewhat subscription-based, also carries the advantage of a clear revenue stream. At the end of June, the company had landed 654 "strategic planning services" contracts with $11.5 million in revenue yet to be recorded. Not many Internet companies can claim that kind of pipeline visibility.

I've filled more than a few column inches of space whining about the high valuations slapped on unprofitable Web companies, so it might seem logical for me to appreciate Jupiter's relatively steady picture. And in many ways I do; Jupiter certainly deserves more attention than most Web-related IPOs that hit the trading floors.

Still, there are always caveats with any new stock, and unfortunately for Jupiter, the company's business model itself raises questions about its ability to become a giant.

Many Web stocks get high valuations because they're expected to post tremendous growth. But compared to most new Internet offerings, Jupiter seems to have a relatively mature business model, especially since it already has all the large Web players lined up. New companies continue to sprout and old traditional ones continue to jump online, but already that might be slowing down at least a little bit; the pace of IPOs in 1999 is off from previous years.

Jupiter grows as more companies get involved with the Internet and buy research. Yet despite Jupiter's citation of a $1 trillion e-commerce market, the company's growth lacks any direct ties to the expansion of the Internet as a whole. It's not like Jupiter actually sells anything to consumers or handles any business-to-business commerce, so using a

And unlike a chipmaker or software vendor, whose shipments would grow as its client gets bigger, Jupiter's contracts bear no relation at all to customer success. "It's clearly not a run up based on the size of the companies, per se," says Kate Berg, director of corporate communications for Jupiter. "It's based on how many projects a customer has going."

As companies get bigger, presumably their planning arms also increase -- but not in proportion to the overall business growth. In any case, those one-year contracts with Jupiter aren't going to change until the year is up. The very thing that makes Jupiter appealing -- the stability of its revenue stream -- could also keep it from rising as rapidly as some of the Web hotshots that rely on more volatile growth engines.

None of that is new to investors in service and consulting companies. But most of those don't carry Web valuations.

Other issues:

  • E-Stamp
  • (Nasdaq: ESTM). I prefer Stamps.com's model, but this isn't necessarily a winner-take-all market. Even if it is, Pitney Bowes (assuming it gets its own online plans going soon) might roll both of its online-only competitors. You might do well to wait this one out, especially given the high market caps now carried by both E-Stamp and Stamps.com.

  • PMC-Sierra
  • (Nasdaq: PMCS), Applied Micro Circuits (Nasdaq: AMCC) Anyone who was shorting these network chip vendors should be sending flowers and thank-you notes to Hi/fn (Nasdaq: HIFN). PMC and Applied Micro find themselves dragged down today by Hi/fn's warning of a first quarter revenue shortfall because of lower demand from Lucent and its Ascend subsidiary, as well as disk drive maker Quantum.

    The Lucent/Ascend combination generates up to 20 percent of PMC-Sierra's business, notes Salomon Smith Barney analyst Clark Westmont, who downgraded PMC to "outperform" from a "buy" rating. Hi/fn's warning, combined with the fact that Lucent saw inventory turnover drop more than 32 percent between last fall and this summer, gives investors reasons for pause, Westmont says. Especially "disturbing" is the fact that Ascend gave almost no warning before canceling orders.

    "This type of sudden switch is not atypical in an inventory stockpiling/depletion cycle, and can keep investors skeptical even after seeing positive earnings results in print," Westmont writes in a research note released this morning.

    But Westmont and other analysts note that leading network chip suppliers have a strong long-term business model. Lehman Bros. analyst Daniel Myers began coverage of PMC-Sierra today with a "buy" rating in spite of yesterday's news, and Merrill Lynch's Joseph Osha started Applied Micro as a "long-term buy" and "near-term accumulate". Ascend might be hitting a road bump, but the overall market will grow for a long time to come. The punishment applied to PMC-Sierra today might be a chance to get in at a lower price. 22GO>