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2HRS2GO: Portal watchers raise their sights

Analysts may have underestimated Portal Software's bottom line until now, but the market isn't, at least not today.

Shares of Portal (Nasdaq: PRSF) started rumbling yesterday with a pair large block trades, and the stock roared even higher at the start of this morning's trading; Portal "gapped" up with an opening price of 104 9/16, more than a dozen points above yesterday's close. Beating analysts' third quarter consensus by 9 cents per share will do that for your stock.



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As a vendor of customer support and billing software for ISPs and communications companies, Portal exemplifies the Deep Throat business model: follow the money. The thesis works especially well when you're operate in an exploding field such as Internet access.

So far Portal has smashed analyst consensus every quarter since going public earlier this year, but research firms may be catching up today. CS First Boston upgraded Portal to "strong buy" from a "buy" rating. Merrill Lynch, which just started covering Portal on Monday with an intermediate-term "accumulate", raised the stock to a "buy" and set a new price target of $140. Merrill Lynch analyst Mark Fernandes also boosted his fiscal 2001 revenue estimate to $175 million from $142 million.

No one expects Portal to keep up the current growth rate forever; the company is on track for annual revenue of $100 million, or nearly quadruple last fiscal year. But expected 75 percent growth rate should be more than enough to keep people happy.

That's in line with what company executives said in an interview yesterday afternoon. "Certainly our growth rate is a little faster than people had anticipated," CFO Jack Acosta told ZDII. "I would expect that people will think we'll move up our profitability to the third quarter of next year instead of the fourth quarter."

Merrill Lynch's Fernandes, CS First Boston's Wendell Laidley and Hambrecht & Quist's Eric Zimits each reflected that belief in research notes released today.

Portal's contracts, rather than relying on a flat fee or a per-server basis, generates revenue for every billing account. As a Portal customer like Qwest bills more people, Portal gets more money; as the businesses of Portal's customers grow, so does Portal's revenue. Thus, Portal doesn't have to worry about consolidation in the ISP field, as long as the industry itself keeps expanding.

"Financial results suggest the Company has already seized a dominant market position and can grow not only from new wins, but as its existing customers grow their businesses."

The rapid growth of the Internet speaks for itself, but even more encouraging for Portal is the field of rivals, or lack thereof. Portal often competes against communications companies' internal software development, CEO John Little said.

"That's really shifted a lot, probably (over) the last six to 12 months, very strongly towards buying an off-the-shelf solution," CEO John Little said. "As far as specific companies competing with us ... we may see companies out there kind of nibbling away trying to be Internet businesses, but there actually is no (billing software) company that we see on a consistent basis around the world. It's sort of unbelievable."

Strong competitors will appear eventually (this is the software world, after all), but for now it's a relatively empty horizon. Perhaps that doesn't justify a $100 share price for a company not expected to make any money for the next four quarters, but you can't expect anything else from today's Internet-crazed stock market. At least Portal seems to have a closer and cleaner path to profits than most.

Other issues:

  • Inktomi
  • (Nasdaq: INKT) Speaking of competition, Inktomi has been a market darling until now largely because there hasn't been any other publicly-traded network caching specialist. The stock is down today with the IPO debut of CacheFlow (Nasdaq: CFLO), but that's not surprising given Inktomi's 40 percent run-up in recent weeks. There's room for more than one player in such a huge market.

  • Vitaminshoppe.com
  • (Nasdaq: VSHP) Media Metrix says the online pharmacy saw a week-to-week traffic gain of 337 percent, the largest increase among e-commerce sites. Getting 275,000 visitors was good enough to place Vitaminshoppe fourth on Media Metrix's e-commerce list, ahead of e-tailers such as eToys.com, CDnow (Nasdaq: CDNW) and Toysrus.com.

    That has today's market excited -- VSHP shares were up 43 percent in early afternoon trading -- but for the skeptics among us, the fact that 275,000 (not exactly a huge number) was good enough for fourth place shows just how far e-tailing has to go to be recognized as a mass shopping medium.

  • eToys
  • (Nasdaq: ETYS) The Media Metrix report also shows the website of Toys R' Us (NYSE: TOY) outpacing the more heralded eToys, both in total visitors and growth rate, which makes me wonder if eToys' reputation isn't overblown. eToys, to its credit, has a far larger base to work from (121,000 weekly average versus 77,000 for Toysrus.com) outside of the holiday season; yet the fact that so many people also jump to Toysrus in crunch time casts doubt on the loyalty of eToys' customers. 22GO>

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