PointCast IPO a bargain?

At a likely $11 per share price, or thereabouts, PointCast's underwriters, led by Lehman Bros., are putting a market value of less than $235 million on the entire operation. But wait. Less than $300 million for one of the best-known brand names on the Internet? Something's not computing here. Who knows, if we dig deeper maybe there's an opportunity here.

TECHNICAL DIFFICULTIES
At first blush, it would seem PointCast is burdened with more than its share of problems these days. Not only does the company's revenue growth look to be stagnating, but its "churn rate" -- the rate at which subscribers sign up for the service, then stop using it -- is now running at an astonishing near-to-100 percent turnover every three months. That suggests the day may come when the Web is literally overflowing with disgruntled ex-users of PointCast and it will be hard to get any new users to sign up.

PointCast's most immediate problem is its software. As the leading Web developer of "push" programming -- whereby individuals get to select "personalized" categories of news and other information to be downloaded to their computers whenever they log onto the Net -- PointCast helped create a whole new approach to Web content.

But the technology to accomplish this involves downloading special software, free-of-charge, from its Web site and into the computers of end-users. And in too many cases, that downloaded software seems not to do the job expected of it. As PointCast's IPO registration statement concedes, the software either conflicts with programming already in the machines and thereby causes them to freeze up and crash, or it takes forever to update itself with fresh news and information feeds.

PointCast hopes to overcome this problem with an updated release of the software, due sometime in the next month or two, according to a company insider. But, recalling the story of Mark Twain's cat (burned by sitting on a hot stove, it thereafter wouldn't sit on any stove), it would appear that perhaps as many as 4 million people have by now tried PointCast and wound up removing its software from their systems in frustration. These are viewers that PointCast will probably never be able to get back, no matter how hard it tries.

Meanwhile, the "push technology" that PointCast pioneered is now becoming increasingly commonplace on the Web, though most such applications seem characterized by technological problems of one sort or another. One example: Microsoft Corp., which is a partner with NBC in MSNBC.

Microsoft has developed its own version of "push" in the form of the Internet Explorer 4.0 browser's "Active Channels" feature. But this feature, too, can create functionality problems for the end user, soaking up system resources on the desktop machine, slowing its functioning and causing frustrating crashes and operating system freeze-ups.

In fact, when you phone up Microsoft's technical support service line for help, software engineers sometimes actually advise you to uninstall the active channels feature and not use it at all since, in many cases, it is proving to be more trouble than it is worth.

These kinds of problems leave a bad taste in the mouth of anyone who experiments with push technology, and may make it difficult indeed for PointCast to reestablish itself as a hot product under almost any circumstances.

HISTORY OF LOSSES
The company is already acknowledging in the IPO that it doesn't expect to see any revenue growth from current levels for at least the next two quarters, suggesting that it won't be until its new software release finally proves itself to be bug-free (if indeed it does) that customers will actually begin downloading the service and using it for extended periods.

Meanwhile, the company's financials sport all the earmarks of a typical Internet tulip-time offering. In its latest three-month reporting period (January through March 1998), the company took in $5.1 million, but spent nearly $4 million just on cost-of-sales outlays, administrative overhead and interest on debt. Add in sales and marketing costs, and the company's operations slipped nearly $6.4 million into the red.

Thanks to a history of such losses, the company's equity start-up capital has long since been wiped out and the balance sheet now shows a total accumulated deficit to date of an amazing $56.8 million. Save for the continuing financial support of its backers, including Adobe Systems, Inc., Gannett Media Technologies International, Knight-Ridder Inc., KPMG Peat Marwick LLP, SOFTBANK Holdings Inc. and Times Mirror, the business would have folded long ago. The filing of this long-delayed IPO suggests that the backers may have finally had enough, and are now trying to shove their burden off on the public markets.

The fact is, were PointCast Inc. in any other business except providing "content" on the Internet, it is doubtful that any underwriter in the United States would have been willing to try to take it public on such numbers. But in the current manic market on Wall Street, investors have shown an utterly insatiable appetite for Internet stocks, no matter how weak their financials.

Consider Nasdaq-traded Go2Net Inc. Though the company's only real asset is a Web site that is generating revenues of somewhere around $700,000 per year -- while racking up losses of nearly $4 for every $1 collected -- Wall Street is nonetheless valuing the company at an incredible 182 times revenues, creating a market capitalization of $128.3 million. Or what about SportsLine USA Inc.? This outfit runs a Web site and news service for jockaholics. In its most recent 12-month reporting period, the company took in $16 million in revenues and racked up $32 million in losses -- a nice, respectable 2-for-1 Internet loss ratio. The company also sports a market value of 34 times revenues.

Multiples such as those make a joke of serious-minded stock valuation, reflecting instead a runaway market that has broken free of all historical constraints (or thinks it has). So if Sportsline USA is worth 34 times revenues, then why isn't PointCast -- a better-known name in Internet circles -- worth at least as much? (We won't even argue that it deserves Go2Net's multiple of 182 times revenues.)

IPO STILL UNDERVALUED?
Even at 34 times revenues, PointCast would be worth $612 million, or more than 2 1/2 times the market value that its underwriters seem to be giving it in the IPO. So, in the upside-down world of Internet investing, PointCast may actually present a kind of weird, perverse logic as an undervalued opportunity in the making. So that makes the underwriters think it's only worth $11 per share.

In 1998, the world seems to be filled to overflowing with investors who think similarly troubled companies are worth maybe three times as much -- if not even more than that.

Bottom line? Anyone for PointCast being priced at $11 per share and opening in the after-market at $33? Stay tuned. It won't be long before we all find out.

Last week PointCast Inc. -- the Sunnyvale, Calif.-based Web company that invented "push programming" and was the talk of the industry two years ago -- filed for its long-awaited initial public stock offering. The surprise now is just how low the asking price has turned out to be.

At a likely $11 per share price, or thereabouts, PointCast's underwriters, led by Lehman Bros., are putting a market value of less than $235 million on the entire operation. But wait. Less than $300 million for one of the best-known brand names on the Internet? Something's not computing here. Who knows, if we dig deeper maybe there's an opportunity here.

TECHNICAL DIFFICULTIES
At first blush, it would seem PointCast is burdened with more than its share of problems these days. Not only does the company's revenue growth look to be stagnating, but its "churn rate" -- the rate at which subscribers sign up for the service, then stop using it -- is now running at an astonishing near-to-100 percent turnover every three months. That suggests the day may come when the Web is literally overflowing with disgruntled ex-users of PointCast and it will be hard to get any new users to sign up.

PointCast's most immediate problem is its software. As the leading Web developer of "push" programming -- whereby individuals get to select "personalized" categories of news and other information to be downloaded to their computers whenever they log onto the Net -- PointCast helped create a whole new approach to Web content.

But the technology to accomplish this involves downloading special software, free-of-charge, from its Web site and into the computers of end-users. And in too many cases, that downloaded software seems not to do the job expected of it. As PointCast's IPO registration statement concedes, the software either conflicts with programming already in the machines and thereby causes them to freeze up and crash, or it takes forever to update itself with fresh news and information feeds.

PointCast hopes to overcome this problem with an updated release of the software, due sometime in the next month or two, according to a company insider. But, recalling the story of Mark Twain's cat (burned by sitting on a hot stove, it thereafter wouldn't sit on any stove), it would appear that perhaps as many as 4 million people have by now tried PointCast and wound up removing its software from their systems in frustration. These are viewers that PointCast will probably never be able to get back, no matter how hard it tries.

Meanwhile, the "push technology" that PointCast pioneered is now becoming increasingly commonplace on the Web, though most such applications seem characterized by technological problems of one sort or another. One example: Microsoft Corp., which is a partner with NBC in MSNBC.

Microsoft has developed its own version of "push" in the form of the Internet Explorer 4.0 browser's "Active Channels" feature. But this feature, too, can create functionality problems for the end user, soaking up system resources on the desktop machine, slowing its functioning and causing frustrating crashes and operating system freeze-ups.

In fact, when you phone up Microsoft's technical support service line for help, software engineers sometimes actually advise you to uninstall the active channels feature and not use it at all since, in many cases, it is proving to be more trouble than it is worth.

These kinds of problems leave a bad taste in the mouth of anyone who experiments with push technology, and may make it difficult indeed for PointCast to reestablish itself as a hot product under almost any circumstances.

HISTORY OF LOSSES
The company is already acknowledging in the IPO that it doesn't expect to see any revenue growth from current levels for at least the next two quarters, suggesting that it won't be until its new software release finally proves itself to be bug-free (if indeed it does) that customers will actually begin downloading the service and using it for extended periods.

Meanwhile, the company's financials sport all the earmarks of a typical Internet tulip-time offering. In its latest three-month reporting period (January through March 1998), the company took in $5.1 million, but spent nearly $4 million just on cost-of-sales outlays, administrative overhead and interest on debt. Add in sales and marketing costs, and the company's operations slipped nearly $6.4 million into the red.

Thanks to a history of such losses, the company's equity start-up capital has long since been wiped out and the balance sheet now shows a total accumulated deficit to date of an amazing $56.8 million. Save for the continuing financial support of its backers, including Adobe Systems, Inc., Gannett Media Technologies International, Knight-Ridder Inc., KPMG Peat Marwick LLP, SOFTBANK Holdings Inc. and Times Mirror, the business would have folded long ago. The filing of this long-delayed IPO suggests that the backers may have finally had enough, and are now trying to shove their burden off on the public markets.

The fact is, were PointCast Inc. in any other business except providing "content" on the Internet, it is doubtful that any underwriter in the United States would have been willing to try to take it public on such numbers. But in the current manic market on Wall Street, investors have shown an utterly insatiable appetite for Internet stocks, no matter how weak their financials.

Consider Nasdaq-traded Go2Net Inc. Though the company's only real asset is a Web site that is generating revenues of somewhere around $700,000 per year -- while racking up losses of nearly $4 for every $1 collected -- Wall Street is nonetheless valuing the company at an incredible 182 times revenues, creating a market capitalization of $128.3 million. Or what about SportsLine USA Inc.? This outfit runs a Web site and news service for jockaholics. In its most recent 12-month reporting period, the company took in $16 million in revenues and racked up $32 million in losses -- a nice, respectable 2-for-1 Internet loss ratio. The company also sports a market value of 34 times revenues.

Multiples such as those make a joke of serious-minded stock valuation, reflecting instead a runaway market that has broken free of all historical constraints (or thinks it has). So if Sportsline USA is worth 34 times revenues, then why isn't PointCast -- a better-known name in Internet circles -- worth at least as much? (We won't even argue that it deserves Go2Net's multiple of 182 times revenues.)

IPO STILL UNDERVALUED?
Even at 34 times revenues, PointCast would be worth $612 million, or more than 2 1/2 times the market value that its underwriters seem to be giving it in the IPO. So, in the upside-down world of Internet investing, PointCast may actually present a kind of weird, perverse logic as an undervalued opportunity in the making. So that makes the underwriters think it's only worth $11 per share.

In 1998, the world seems to be filled to overflowing with investors who think similarly troubled companies are worth maybe three times as much -- if not even more than that.

Bottom line? Anyone for PointCast being priced at $11 per share and opening in the after-market at $33? Stay tuned. It won't be long before we all find out.