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Monday, July 26, 1999 Published at 18:17 GMT 19:17 UK

Business: The Company File

Freeserve: Time to sell?

To keep its value, Freeserve will have to increase its user base

On the day of their market debut, Freeserve shares gained 37% or 55.5 pence on their offering price of 150p.

So should investors bail out now and make a quick profit, or would it be better to hold on - or buy even more - and hope for bigger gains?

For most investors, share buying should be a long-term investment. Share prices may be volatile, but over the past two decades the stock markets have outperformed nearly every other investment available.

Only people who have the money, knowledge and nerves to take heavy losses on their portfolio should attempt to "ride the market".

Day traders for example - private investors who hop in and out of shares to profit from small price movements - usually make losses for many months before they manage to make some returns on their investments.

But Internet stocks like Freeserve are a particularly tricky beast to handle. Yes, some of them have made spectacular gains and held on to them. The number of investors sighing that they should have bought online auctioneer eBay when it was floated is too large to count.

But for every success story, there are many flops - companies that flourished for a week or two only to disappear in ignominy.

The Freeserve verdict

So what do the experts say about Freeserve?

Their verdict appears to be nearly unanimous: Now is a good time to dump the stock.

[ image: Will Freeserve investment news be good long-term?]
Will Freeserve investment news be good long-term?
Investment bank Credit Lyonnais, for example, has rated the stock as "sell".

Credit Lyonnais analysts Peter Wyatt and Paul Smiddy believe that even when compared with the high valuation of US Internet stocks, "Freeserve is worth less than the float price".

They warn that Dixon's Internet service is facing increasing competition and declining advertising revenues.

At investment bank WestLB Panmure, analyst Miles Saltiel is warning investors to be cautious.

He believes that "for a few days" the share will make a strong debut, but is convinced that the company faces a number of challenges that can undermine the stock in the long-term.

His estimate of "fair value" for the stock is just 60 pence.

At Merrill Lynch, the experts have come to a similar conclusion. They see a price of 70p to 80p as fair value.

Rarity value

So why is Freeserve launching at such a high price and surging on its first day of trading?

The main reason is the novelty value, says Khuram Chaudhry, Equity Strategist UK at Merrill Lynch. Freeserve is the first pure internet company to float on Europe's stock markets.

This makes it an interesting opportunity for investors who try to have a share of the action and add an internet stock to their portfolio.

Another factor is scarcity. Dixons is floating just 20% of Freeserve and the share offer was 30 times oversubscribed.

Mr Chaudhry says that this has driven up prices and may keep them up for a while.

During the coming weeks, he says, there will be enough demand for Freeserve shares to keep prices high.

Small investors therefore won't have to panic if they can't immediately get through to their stockbroker to sell.

But who can be sure whether the experts have got it right?

For months there have been predictions that the "internet bubble" is just about to burst and share prices will come tumbling down.

Indeed, there have been some bumps on the road. The long-predicted crash, though, has never happened.

The risk factor

So can Freeserve stay afloat?

In its share prospectus, the company warned investors on six pages about the dangers of buying the stock. Here are just a few examples:

  • "Freeserve has a short operating history, has incurred net losses since inception and expects future losses."
  • Freeserves networks "may not be able to accommodate its growth".
  • "Freeserve's business strategy is unproven."
  • "The market for internet advertising is uncertain".
The company's business model depends on a quirk in the way UK phone companies charge their customers.

That has made it such a big success with internet surfers, but could be its big Achilles heel as well.

Internet specialists Durlacher, a stockbroking and consulting company, believes that subscription-free Internet Service Providers (ISPs) like Freeserve could soon face a truly bleak future.

Durlacher's Nick Gibson says: "Most subscription-free ISPs, including Freeserve, offer little to differentiate themselves and provide little or no barriers to exit for subscribers."

He warns: "As long as users can switch accounts so easily, free-ISPs leave themselves vulnerable to churn", where users quickly abandon one provider for another.

Rival ISP and shopping site Zoom, for example, predicts that it may soon stop charging users the costs of the phone call to log on to the net and finance itself completely through e-commerce activities.

If Zoom or its rivals take that step, Freeserve's biggest revenue stream could immediately dry up.

Freeserve's future and that of its share price, depends therefore not on the number of people using its servers to access the internet, but on how many people it can persuade to do business through its web site.

Investors should never forget: Buying shares is a risky investment. If they sell now, they may make a quick profit - minus any brokerage charges.

But if the Freeserve model takes off, they will be like those investors who passed up on the chance to buy eBay or when the stock was cheap.

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