Frequently, the difference between a successful investor and one less so is all timing. Making money in the market requires not only picking the right companies to invest in, but also deciding when (or when not) to invest in such companies.
I rediscovered Earthlink (NASDAQ: ELNK) last year while running a value screen. Like many stocks that end up in the proverbial value barrel, this company was once a high flier, trading at a split-adjusted $50, while now trading around $8. There were highs and lows, culminating in Earthlink's founder being charged with fraud and money laundering. I recalled that Earthlink was in the now-dying dial-up ISP business during the bubble days of the internet and decided to dig a little deeper.
What I saw, when I looked under the hood, caught my attention. While Earthlink was indeed seeing dial-up customers dial-out of their contracts, Earthlink was converting a good percentage of these customers to DSL service. It was working well -- while the company wasn't growing much, it was producing a lot of cash from operations and instead of just building a cash horde, like many companies would do in a situation like this, the company was looking to reposition itself with two major, seemingly sexy initiatives.
- Helio: In the quasi, pre-Facebook days, MySpace was the bomb in the social networking space for millions of contact-hungry teenagers. Earthlink was making a large investment (in the hundreds of millions of dollars), along with South Korean SK Telecom (NYSE: SKM), in creating a wireless service and handsets for MySpace users, now called Helio.
- The other was Muni Wi-Fi: cities all over America were working on building citywide, wireless networks to help boost productivity and lure knowledge workers back into town. Earthlink was winning projects to help build-out these networks in cities like San Francisco and Philadelphia (in spite of having little experience in managing the infrastructure of such a project.)
I like companies that are aggressive about changing what they do in the face of a declining core business (check out The Innovator's Dilemma for more about how hard this is even for the best corporations). Both Helio and Muni Wi-Fi had the potential of being huge. I just couldn't gauge how huge, how big an investment both projects would eventually require and how long it would take.
Without this critical info, I passed on an investment in ELNK.
So, I read that Earthlink is pulling out of the Muni Wi-Fi business with interest. The market clearly liked the news that Earthlink is rerationalizing this business, tightening the purse strings, and retracing its steps out of these large projects. The stock was trading up 10% after hours on Friday. After a little research, I also see that SK Telecom is pouring even more money into Helio. While this does value ELNK's investment in Helio at almost $2 per share, I can't help but feel that this money is good money following bad money.
Earthlink may eventually get its act together. Investors, though, would be wise to pass for now, just as the company itself is passing on its new business model.
Zack Miller is the Managing Editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund. Disclosure: Author doesn't own any stocks mentioned.
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Reader Comments (Page 1 of 1)
11-18-2007 @ 1:02PM
Saving Bryan said...
It's too bad Earthlink is dying. Their municipal wi-max program would have made them ahead of the times. I still do think Helio has one of the most attractive phones in the market. I'm waiting for my AT&T contract to expire so I can get the Helio Ocean.
11-18-2007 @ 2:27PM
Erik Sagen said...
Earthlink is still around? News to me. I figured they disappeared years ago.
11-18-2007 @ 1:04PM
Bryan said...
One more comment. Shouldn't the name of the title be, "Why-Max?" Wi-Max is the technology Earthlink is deploying, not Wi-Fi.
11-18-2007 @ 1:08PM
Zack Miller said...
Hi Bryan,
Thanks for the great comments. No, it's actually Municipal WiFi -- the network is deployed via a wireless mesh. WiMAX is a different standard.
11-18-2007 @ 2:27PM
Bob said...
Reed Slatkin was a co-founder, not THE founder.
11-18-2007 @ 2:30PM
Zack said...
point well taken.
11-19-2007 @ 12:03AM
J said...
I agree with your decision to pass on investing in Earthlink. Their strategy is all over the place. Not to mention, they're just a big marketing company. They don't own a network so all they can do is market other firm's technology. For example, they use Covad Communications network to offer their customers DSL, and their LPV product is Covad's technology. It seems to me they need more control over their own destiny, rather than having to depend on CLEC's and cable companies who actually own networks.