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2HRS2GO: takes off (Nasdaq: DSLN) has gone from an IPO joke to a bona fide investor favorite.

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Shares of rose 12 percent today on news of the company's deal with Covad Communications (Nasdaq: COVD). The deal puts into the largest metro markets, areas that were previously out of the company's reach.

The company sells DSL service (duh) to small and medium-sized businesses, rather than the fat cat enterprises with monster contracts that arouse Wall Street. And so far doesn't have many of those small customers: the company that had only 958 customers at the end of 1999, along with 600 in backlog.

Fourth quarter revenue totaled just $811,000, or roughly equivalent to Microsoft (Nasdaq: MSFT) sales every 22 minutes in fiscal 1999. Analysts expect to lose money all of this year and next. The company has already dipped into the public trough twice in five months, with an October IPO and a follow-up offering last month.

A combination of rapid secondary, rapid non-existent earnings, a tiny revenue base and a tiny base of tiny customers normally turns off the stock market. But arguably is the best buy among pure play DSL service provider stocks.

At least that's the view of Sanders Morris Harris analyst Dan Ross, who started coverage of yesterday with a "strong buy" rating and a price target of $45 per share. His timing couldn't be any better, coming just ahead of's Covad announcement.

For whatever its worth, know that Ross' firm had minor roles as one of the bottom rung underwriters for's stock offerings. But unlike the investment banks who lead IPO teams, the outfits at the end of the underwriting ladder aren't obligated to cover the stocks in question. Covering is optional for Sanders Morris, which makes it one of the more objective analyst voices out there: at least three of the six firms covering were part of the company's lead underwriting group.

Ross' timing makes sense, given the Staples (Nasdaq: SPLS) pact unveiled three weeks ago. That agreement puts kiosks throughout the world's largest network of office supply superstores -- obviously a good way to reach small business customers.

Getting nationwide distribution with Staples meant needed a national network. Covad fit the bill. Today's investors are happy.

"It was kind of a given that it was going to happen," Ross says. " already had the Staples agreement, so they needed to find a first-tier partner."'s core markets are small and medium sized metro areas. By reselling Covad's service, now can move into the largest areas.

No one can say how much Covad will add to's sales, but it certainly doesn't hurt. Prior to the deal's announcement, Ross already predicted's annual revenue will reach $111 million next year, compared to $1.3 million last year.

Most important to his thesis, Ross believes will reach profitability far ahead of other DSL providers. He predicts that within 8 to 9 months will reach positive earnings before interest, taxes, depreciation and amortization. Among other DSL providers covered by Ross, he doesn't expect EBITDA to hit the black until 22 months from now for Covad; 24 months for NorthPoint Communications (Nasdaq: NPNT); and 37 months for Rhythms Netconnections (Nasdaq: RTHM).

That doesn't mean will reach net profits long ahead of those companies. Being purely a retail service, will spend a larger percentage of its revenue on sales and marketing than companies like Covad and Northpoint, which are largely wholesalers. But Ross believes will generate net income before other DSL providers, just not as far ahead as on the EBITDA line.

Fewer rivals mean a shorter road to profit for While Covad, Northpoint and Rhythms face stiff competition from all sorts of broadband providers in the largest markets, largely has the smaller areas to itself, Ross says. As a result, can charge higher fees and generate more revenue from each subscriber: $280 per line in the latest quarter reported, compared to $126 per line for Rhythms.

Even in the major markets now available to courtesy of Covad, the former should maintain decent margins because the nitty-gritty infrastructure issues will be Covad's problem.

Maybe those lines of reasoning persuaded investors to drive DSLN shares up 180 percent in the five months since the company's tepidly received IPO.

I'm not entirely convinced. Ross' arguments assume will continue adding customers at a consistent pace, and that competition will remain mild enough to let keep growing.

Neither of those points is guaranteed. While it may be true that DSL installations are moving faster in tier one markets, cable access providers seem to be actually moving faster in the second and third tier regions, rather than the top cities.

Look at the availability for the Roadrunner cable service: there are far more places like Binghamton, N.Y. (one of Roadrunner's earliest markets) and Johnstown, Pa. on the list, as opposed to places like San Diego. So might face more broadband competition in smaller regions than people think.

Still,'s growth opportunity is probably as significant as that of any other DSL provider -- but it carries the lowest market cap. I suppose that's worth something. 22GO>