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THE DAY AHEAD: Too far too fast for InfoSpace

COMMENTARY--Is InfoSpace becoming a Wall Street darling again? Shares of InfoSpace have surged more than 200 percent in just a month amid better-than-expected earnings and hopes that the company will be able to cash in on next-generation wireless services.

But Wall Street is quietly wondering whether InfoSpace shares have come too far too fast. On April 3, InfoSpace closed at $1.71. On Wednesday shares closed at $5.64. "We don't see this as sustainable," said ABN Amro analyst Keith Bachman, who rates InfoSpace a "hold."

InfoSpace's gains aren't likely to last. The problem? Its first-quarter earnings topped estimates, but all that proved is the company is stable following the management upheaval that brought Naveen Jain back as CEO. Last month, InfoSpace reported a loss of 2 cents a share on sales of $46.6 million. The company also stuck with its 2001 outlook, which calls for it to lose 3 cents a share on sales of $214 million, according to First Call.

"We are cautious, but we are not changing our guidance," Jain said.

Is that statement worth a 200 percent run-up for a company that is rebuilding in 2001? Bachman doesn't think so. "I don't see it getting better, but I don't think it's getting worse either," he said.

You can't blame Wall Street for being a little skeptical. In the last three months, InfoSpace has lost a well-respected CEO, admitted the acquisition of Go2Net was a debacle and cut 21 percent of its work force.

InfoSpace provides commerce and consumer infrastructure services to merchants and on wireless, Web and broadband platforms. The company provides leading portals with search, messaging and other features such as maps, directories, financial data, traffic reports, sports, news and entertainment. It also delivers that information over wireless networks and plans to boost sales as next-generation, or "3G," services take hold. InfoSpace also allows merchants to promote and sell goods on its network.

Investors have pounced on InfoSpace because of its wireless sales, but that business represents about 20 percent of revenue, analysts said. Meanwhile, the company's portal business, which still accounts for the bulk of sales, could see rough times ahead.

According to U.S. Bancorp Piper Jaffray analyst Safa Rashtchy, InfoSpace's sales could be under "heavy pressure and are likely to drop significantly as advertising and content based contracts expire," hurting the company's portal business. InfoSpace counts America Online (NYSE: AOL) and Microsoft's MSN among its major clients, but it also caters to struggling portals such NBC Internet, which is being folded back into NBC. (CNET Networks, publisher of ZDII, has holdings in NBC Internet.)

In his weekly Internet stock update, Rashtchy said InfoSpace shares are overvalued and the stock "is likely to trade at only a slight premium to its 87 cents in cash per share."

Other analysts didn't have as harsh of an assessment of InfoSpace, but many noted that shares are ahead of themselves. "Wireless will power InfoSpace growth, but there needs to be evidence of traction and new business wins," said SG Cowen analyst Scott Graves.

InfoSpace touted wireless customers such as Cinergy, Lucent and Nortel Networks, but many of these deals are in the early stages. Under deals with Lucent and Nortel, InfoSpace services will be packaged in with the companies' telecommunications equipment. When wireless networks are upgraded, InfoSpace goes along for the ride and collects a fee for each subscriber.

Graves and other analysts, however, note that InfoSpace has to rely on wireless companies to upgrade the networks and then hope consumers run out and buy new wireless phones. Simply put, it may take a while. In addition, wireless carriers may hold out for better pricing from InfoSpace.

"Wireless carriers are unlikely to renew these contracts at the same price," Rashtchy said. "A number of carriers have started to look at different vendors for various parts of the solution they get from InfoSpace and, more importantly, the huge panic rush of 1999-2000 is over."

According to Rashtchy, carriers are much more methodical about their upgrades, which could hurt InfoSpace's wireless revenue growth.

"Our wireless business has never been stronger," Jain said during last month's conference call. "InfoSpace has the staying power needed to move forward in this business."

The big question is how quickly InfoSpace will move forward with wireless sales. At best, the company's wireless business will account for a third of sales by the end of the year, analysts said.

Nevertheless, William Blair analyst Abhi Gami, who rates InfoSpace a "buy," reckons that shares are a good bet in the long run. "I think the stock was too low to begin with," said Gami, referring to InfoSpace's dollar days. "If you believe in wireless, InfoSpace looks good."

Gami acknowledged that InfoSpace has some problems, but shares are "reasonable," especially if the company can continue to beat estimates leading into 2002. Jain said he hopes InfoSpace's wireless business growth will be "substantially higher" than the current mid-teens level, but it all depends on the upgrade cycle for networks and handsets.

Graves said InfoSpace is "clearly a 2002 story," but noted that the stock may have found a bottom. "In the background this could be an acquisition story," Graves said. "InfoSpace has customers and cash and other companies could be interested. That gives the stock a floor."

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