NetZero Goes 0 for 2; Pitney Bowes Gets Stamp of Approval

NetZero (NZRO)

Jim: Don’t buy

Mike: Don’t buy

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Jim: Now, Mike, we both know the old saw about how one way to run a successful business is to give ‘em the razor and sell ‘em the blades. But--

Mike: What if you’re giving away the razor and the blades?

Jim: Exactly! Because NetZero offers customers free access to the Internet.

Mike: As do several other firms, and their business model is basically the same: You get the free access all right, but in exchange they shove advertising down your throat. It’s sort of the same premise as watching television.

Jim: Except in NetZero’s case, first you have to fill out this long questionnaire that gives them a ton of information about your life, which in turn they peddle to the advertisers.

Mike: There’s more to it than that. Yes, they not only peddle that demographic information in bulk to advertisers, but they offer advertisers a way to reach you as a targeted audience. In other words, an advertiser might spend a little bit more to put an ad up on the screens of all potential car buyers.

Jim: It all works as long as you’re online. But most of the time you’re not.

Mike: There’s a little box on your computer screen--that you can’t turn off--that carries all this advertising. NetZero makes no bones about the fact that it tracks you everywhere you go on the ‘Net, every mouse click you make.

Jim: Suddenly, “free” doesn’t sound so appealing.

Mike: It knows every Web site you’re visiting. And NetZero has what it calls rockets, which are the highest-priced ads. For instance, if you happen to click on a site for Saturn cars, that little box on your screen might suddenly show you an ad for a Honda instead.

Jim: Well, I guess not everyone is a privacy freak, because NetZero claims to have something like 4 million subscribers, which places it second in size behind only giant America Online.

Mike: Although we should say statistics about online subscriptions and activity are notoriously soft. And it’s even harder to tell how many of them are actively using NetZero, because those kinds of consumers often subscribe to 40 free Internet services.’

Jim: Why?

Mike: They’ll use one or another either in rotation or they’ll use one until they can no longer get a free connection, and then they move on to the next. In other words, how solid are these audiences?

Jim: Anyway, NetZero’s stock was doing OK until January, when it went into a dramatic slide that sliced its value in half. Now it sells for less than $8 a share.

Mike: It’s had plenty of company, of course, especially among the “dot-com” crowd.

Jim: Occasionally NetZero has gotten a lift, like in April, when wireless-phone giant Qualcomm invested more than $140 million in NetZero. But naturally NetZero is still earning zero, and frankly I see its prospects for going forward as little more than zero. I’d avoid the stock.

Mike: I wouldn’t buy this stock either. Right now, in the Internet world, we’re seeing one of history’s greatest transfers of wealth from venture capitalists to the average consumer.

Jim: Meaning?

Mike: Meaning the venture capitalists--and stock-market investors--put a lot of money into NetZero. That’s the money that’s going out the door as NetZero covers its real expenses, such as the cost of providing Web access for its subscribers: phone lines, connections and so on. Those are the costs that are eventually going to have to be covered by advertisers.

Jim: Well, as an investor I’d be worried about how NetZero’s advertising income is going to keep growing. Yes, the advertiser is getting a targeted audience, but whether it’s No. 2 in size or not, NetZero is but a blip on the Internet. So how much longer will advertisers feel they’re getting enough bang for their bucks? Otherwise, NetZero is just becoming a huge database about Internet users.

Mike: Yes, but databases are valuable.

Jim: You mean NetZero is a takeover target?

Mike: I don’t know whether anyone would buy the company, but that database has value and could fetch NetZero a pretty penny. But let’s be realistic: These free Internet services have come under intense scrutiny by investors in the last few months. The market is no longer willing to accept on faith that there is a huge pot of gold at the end of every dot-com rainbow.

Jim: They’re also no longer willing to accept quarter after quarter of losses.

Mike: This is a point we’ve been driving home since our very first column nearly two years ago. And yes, at times we’ve gotten our toes cut off with a cleaver for sticking to our guns about this. But now the day of reckoning for these loss-ridden Internet companies is coming--fast. And I don’t think $8 or so is low enough to jump into NetZero.

Pitney Bowes (PBI)

Jim: Buy

Mike: Buy

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Mike: Up next is another company that’s looking for real opportunity on the Internet, in part because it’s one of the oldest makers of office equipment.

Jim: So the principle is “evolve or dissolve,” right?

Mike: Right. Pitney Bowes has long been synonymous with the postage meter.

Jim: That little machine that stamped the postage directly onto an envelope.

Mike: And that became part of the daily fabric of life. You know, to this day when you go to the post office there are two mail slots--one for stamped mail and one for Pitney Bowes mail.

Jim: Which the Postal Service refers to as “metered” mail. Although we should say there are other postage-meter companies. But there’s no question Pitney Bowes was the leader. And here’s a classic case of a company that really had to adapt with the times because it was in serious danger of becoming the equivalent of a buggy-whip outfit.

Mike: Or to bring the trope up to date, it was in danger of becoming road kill on the information superhighway. And that’s because only last year a company by the name of Stamps.com appeared.

Jim: Right. Followed promptly by E-Stamp.

Mike: Both of which offer small businesses stamps they can order over the Internet and print out on special paper, or through special devices on the premises. Customers no longer had to go to Pitney Bowes and rent a meter. They no longer had to wait for the new memory chips to be issued by Pitney Bowes whenever there was a postage hike. Things were much easier.

Well, now Pitney Bowes is in the electronic-stamp business too.

Jim: Not only in that business. Pitney Bowes is also in a lot of what I call current-day office-supply lines. For example, it’s a leading provider of fax and copier systems. Obviously it’s not as big as Xerox . . .

Mike: But it’s had a better year.

Jim: Than Xerox? Who hasn’t? In any case, Pitney Bowes is still a player there. It’s also a major provider not just of hardware but of services for helping businesses handle customer mail, document management and things like that.

Mike: I’ve got to tell you, I like Pitney Bowes.

Jim: I do too. And we’re not alone. Of the 11 analysts on Wall Street who follow this company, all 11 have “buy” recommendations on the stock. Of course, you could take that and a dollar and get yourself a cup of coffee.

Mike: Well, maybe $3.

Jim: That’s because you drink Starbucks.

Mike: Make that $3.75.

Jim: Anyway, it’s easy to like this stock. This company is profitable and growing, not at lickety-split speed, but it is growing. Analysts’ consensus estimate of earnings growth over the next five years is 13% a year.

Pitney Bowes seems to be making a nice transition to the Internet. And the stock is relatively cheap, selling for about 16 times this year’s estimated earnings.

Mike: We should note that, for the last five years, the stock hasn’t quite kept pace with the broad market as measured by the Standard & Poor’s 500 index.

Jim: True, and normally I’d rather place my bet on the broader market. But let’s give Pitney Bowes its due. Even though the company was going through a transformation, its stock kept pace pretty well. I think now it’s poised to outperform the market.

Mike: We also should concede that there are reasons earnings may look a lot better in the near term.

Jim: It’s what Wall Street likes to call “easy comparisons,” which is to say the company had some soft quarters in the second half of last year, so even if they do a so-so job this year, the profit growth will look good.

In this year’s first quarter there was some talk on Wall Street that the company’s 5% revenue growth was pretty small. But again, I see its top line accelerating the rest of the year.

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Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age” (HarperBusiness). Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

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