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2HRS2GO: StarMedia gets harsher treatment than rivals

Think about this for a moment.

Analysts downgrade StarMedia Networks (Nasdaq: STRM) on concerns about competition. Merrill Lynch's Michel Morin cuts STRM's near-term rating to "accumulate" from a "buy" rating and lowers his estimates. Salomon Smith Barney's Lanny Baker reduces STRM to a dreaded "neutral" from a "buy" rating and sets a price target of $45, or nearly $3 below the stock's Friday closing price.

The moves caught StarMedia shareholders off-guard. Shares of the stock plunged at the open and traded 34.5 percent lower shortly after noon ET.

An understandable reaction, following the company's statement Friday that it would boost its marketing budget by $12 million this year. Not that I necessarily agree with the market -- after all, growing competition in Latin America is hardly new -- but the plunge in STRM's price isn't surprising.

Now think about this: Why aren't other StarMedia's peers getting pounded as much?



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At least two of StarMedia's competitors, Terra Networks (Nasdaq: TRRA) and El Sitio (Nasdaq: LCTO), trade on the Nasdaq. Shares of Terra were down nearly 5 percent in the early afternoon. El Sitio had fallen almost 7 percent.

That's a noticeable decline, but nowhere near the STRM mauling. Yet the issues cited by analysts are hardly unique to StarMedia.

Salomon Smith Barney's Baker approves of StarMedia's decision to increase marketing, but that also means the competition is getting stiffer. Baker especially worries about free ISPs sprouting like dandelions in spring.

"Dozens of new entrants, particularly in the free ISP category, are being launched every few months in Latin America at present," Baker writes. "The associated competitive noise may temporarily obscure the financial firepower of StarMedia's business model."

It's a legitimate worry for StarMedia's fledgling ISP plans, on top of other competition from the likes of America Online (Nasdaq: AOL) and other multinational Internet access providers.

But doesn't that apply to every other Latin American ISP? That's not a question for Baker to answer, since he doesn't follow Terra. First Call has no analysts at all listed for Terra.

Yet you could argue that StarMedia has less to fear from competition than Terra, because the former has established a better brand. In the latest quarter reported, StarMedia's websites reported page views of 1.7 billion, or more than double the combined total of Terra and El Sitio.

Granted, that's just on the media side of things. In the ISP business, Terra is far more involved than StarMedia, whose own Internet access venture comes in the form of a separate company in which StarMedia has a minority stake. Terra also knows something about free access -- half a million customers in Spain use Terra's free ISP service, which also has been in Brazil since last month. And Terra has a deep-pocketed, established telecom backer in the form of Spain's Telefonica SA.

On the other hand, StarMedia also doesn't rely heavily on ISP business for direct revenue, although CEO Fernando Espuelas says it will produce money. From StarMedia's viewpoint, its ISP venture merely provides another doorway to the StarMedia network, rather than being an integral part of the business itself.

Besides, there's no reason why StarMedia shouldn't be able to leverage its own relatively well-known brand for a free ISP, just as portals are doing in the United States. Other analysts such as Chase H&Q's Paul Noglows, believes StarMedia will be just fine.

"StarMedia will be a beneficiary long-term of a shift in investment focus to non-U.S. Internet markets," writes Noglows, who repeated a "buy" rating on the STRM. "The stock will serve as a template for how to exploit the robust international growth of the Web long-term."

People can spend the next five years debating the relative threats posed by Internet competition in Spanish- and Portugese-language countries and it wouldn't matter a whit if the market treated everyone equally. Unfortunately, it doesn't.

With today's declines, El Sitio carries the lowest valuation; it's market cap of $817 million, represents roughly 118 times last year's revenue. However, El Sitio is also the smallest and least established of the three Nasdaq-traded Latin American Internet companies.

StarMedia now carries a market cap of about $2.18 billion, or 242 times last year's revenue. Terra is valued at $29.34 billion, or a price-to-1999-sales multiple of roughly 373.

Granted, all these valuation numbers appear absurd. But it's still worth wondering why the market thinks less of StarMedia than its peers. 22GO>