Shares in soon to be listed internet service provider Freeserve Plc should be avoided according to London investment bank WestLB Panmure. However, the first big net stock to hit the London Stock Exchange still looks set to be massively oversubscribed. Panmure said in a research paper published late Tuesday that Freeserve’s ISP revenue stream is a trivial business line and that two years ago its portal was the cool business model, but now is showing tell-tale wrinkles.
The firm argues that without the security of fee-paying subscribers, and the stickiness of an ISP such as American Online Inc, the firm is too risky to invest in for the long term. The report questions the validity of valuing Freeserve as a cut-down AOL, saying instead it should be valued as a portal based on a value of unique site visits. Using Yahoo Inc and Alta Vista Inc as models, Panmure says that Freeserve should be worth 60 pence per share, or as little as 40% of its currently valuation of 1.51bn pounds ($2.3bn).
Despite this, the demand from retail investors has been enormous, according to analysts. They could find their applications reduced by up to two thirds, as Freeserve and brokers Cazenove and Credit Suisse First Boston allocate more shares to institutional investors. WestLB Panmure admits that share prices are likely to rocket in the short term, but concludes that if you aren’t in and out during stabilization and certainly within 28 days investors should beware. The bank also points out that this caution should not necessarily be extended to all internet stocks, due to Freeserve’s unique business model.
