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2HRS2GO: Netcentives gets boost

When an analyst starts covering an Internet stock, it's usually not worth mentioning.

That's because the great preponderance of Internet coverage initiations these days come from IPO managers doing their job. They have to back up their clients, or at least protect their reputations (such as they are) as investment banks that can run successful offerings.

So this morning's US Bancorp Piper Jaffray action on Netcentives (Nasdaq: NCNT) merits notice, because Piper Jaffray didn't manage or co-manage the IPO, although it did handle 100,000 shares in a small underwriting role.

The non-managing underwriters don't have to bother with research coverage, but Piper Jaffray analyst Timothy Klein likes what he sees with Netcentives. Klein, who specializes in "e-Commerce: Horizontal Markets & Enablers", began Netcentives with a "strong buy" rating and a price target of $65 per share.



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Including Netcentives, Klein covers five stocks. Three of them went public with Piper Jaffray's help as a prominent assistant. Digital River (Nasdaq: DRIV) and Netcentives didn't.

Maybe that's why the market is treating today's report with some gravity. Shares of Netcentives rose 1 1/8 to 48 7/8, on volume of less than 200,000 shares by early afternoon. The stock has been slumping since a spike in mid-December, but it remains far above of its level immediately following a lousy first-day showing.

That Netcentives has been risen despite a relative paucity of catalysts speaks well for the stock, especially considering the fact that its field of consumer e-commerce has been overshadowed lately by the hotter field of business-to-business. To its credit, Netcentives has an intriguing model.

Essentially the company took a tried-and-true gimmick -- bonus points and other carrots for shoppers -- and applied it to the Internet in the form of networks for different groups. Netcentives pitches it as a way to keep consumers coming back.

"In our opinion, this infrastructure is the first and only such online loyalty platform that allows companies to create, deliver, and manage incentive programs tailored to individual business needs," Klein writes. "The resulting first mover advantages are truly huge as it gives Netcentives the potential for much greater reach as its platform addresses both the front- and back-end needs of e-commerce."

Young Internet companies like Netcentives lose money. First Call consensus sees increasing losses for Netcentives each of the next two years. But if you find that disturbing, you have no business investing in Internet stocks.

For those who do, Netcentives at least seems to be moving in an interesting direction. Klein notes the company now offers its technology on a private label basis, powering the incentive programs of companies like American Express. Netcentives also has branched into non-consumer environments, such as online orders for Cisco Systems (Nasdaq: CSCO), whose customer representatives get bonuses for getting clients to buy online.

It's not limited to the Internet (for some reason that statement sounds weird), Klein says.

"As a loyalty program technology infrastructure provider, Netcentives can address more quickly international markets and not just online activity, but offline where the bulk of commerce activity is and will be conducted," he writes.

Best of all from an investor's point of view, the company's revenue should become more predictable as it grows. "Netcentives? position as loyalty network hub/mint allows it to build highly recurring transaction based revenue streams from diverse sources and generate very positive cash flow dynamics with negative working capital needs," Klein writes.

For valuation purposes (whatever that means in today's investing world), Klein averaged the price-to-revenue multiples of Internet commerce and infrastructure companies using some sort of network model, such as Cybersource, BeFree, Broadvision, Inktomi, Infospace, Cybergold, 24/7 Media and Doubleclick.

Yet the Piper Jaffray analyst sees little real competition for Netcentives. Other companies that offer cash rewards or bonus points, such as Mypoints.com and CyberGold, operate as direct marketers; Netcentives supplements an e-tailer's normal offerings.

Although the concept of rewards sounds simple, it takes complicated software to handle different bonus programs and tailor them for each company, Klein says. Netcentives spent years developing its platform.

"If it were that easy, presumably it should have taken as long (to develop) as it did," Klein says. "You can either conclude that they're incompetent or that they really have something. I believe they really have something. The technology is fairly complex ... It's really like a financial institution, because it's managing and controlling all this currency.

Perhaps that's why Netcentives has no head-to-head rivals.

"Netcentives? biggest competition comes from large brands hat build their loyalty infrastructure in-house," Klein writes. "Offline loyalty players ... do pose something of a competitive threat. However, with a four-year lead in developing and refining its processes, its business process patent, and the significant early progress made into the custom loyalty area, Netcentives will remain ahead of the competition."

Not a bad position in which to find yourself.

Other issues:

  • Applied Materials
  • (Nasdaq: AMAT) I won't pretend to understand the intricate details of chip capital equipment, so I'll take Applied's word for it when the company says the technology of Etec Systems (Nasdaq: ETEC) fits well in a broader product line.

    But I do wonder if Applied couldn't have bought Etec for a much cheaper price before the entire chip manufacturing industry emerged from the latest downturn; on the other hand, Applied's own stock until today was trading near its all-time highs, so perhaps it didn't have the currency to do it until now. In any case, I wouldn't worry about the deal in the long run; Applied should be able to boost Etec's margins once operations are integrated. 22GO>