Two on line for Net returns

Click to follow
The Independent Online
THE explosive growth of the personal computer market has been sent into overdrive by the huge rush to join the Internet, the worldwide computer network that allows users to tap into everything from cookery notes to hard-core pornography for little more than the price of a local phone call. With more than 40 million computers linked to the Net, there are inevitably opportunities for investors. Two companies that stand to benefit are Unipalm and Datrontech.

Unipalm is growing sales in its most promising line of business not by a respectable 10 per cent a year but by 10 per cent a month. The second company, Datrontech, is a distributor of memory upgrades and other accessories to enhance personal computers. Between 1990 and 1994, its sales grew from £8m to £86.5m, while profits quadrupled, with more of the same expected for the current year.

The growth of these companies is rooted in the explosive worldwide spread of computer technology. Computers outsold cars last year, with 45 million PCs sold worldwide. By 2000, annual sales are expected to exceed 100 million units, which means personal computers will be outselling televisions. This growth is creating an amazing number of opportunities. Shares in such US giants as Intel and Microsoft, which supply respectively the microprocessors and the key software packages, are powering to new highs almost daily, in a boom that is lifting the entire US stock market. The excitement is starting to infect the UK stock market, where small companies such as Unipalm and Datrontech are growing even faster.

There are two businesses within Unipalm, though increasingly they are converging. The old Unipalm is a distributor of products to help corporations link their computers in the office (local area networks or LANs) and between offices (wide area networks or WANs). As the number of computers in LANs and WANs has grown, it has created the opportunity to use tele- communications networks to link all computers worldwide through the Internet, which has become a dominant force in the lives of many as they "chat", "date", swap ideas and buy and sell goods and services.

It seems likely that virtually all computers will eventually be linked to the Net, with astonishing implications for many aspects of daily life.

The second part of Unipalm's business - the more exciting bit - is its subsidiary, Pipex, which links large companies to the Internet via leased phone lines and ISDN lines. Each new customer pays Pipex around £10,000 a year, and its customer base is growing at a phenomenal rate. At the time of the March 1994 flotation, new customers were being signed up at a rate of between 10 and 15 a month. At the time, the group said its target was a growth rate of 60-100 customers a month in two years' time.

In March this year, the group put on nearly £800,000 of additional annual revenue, achieving its objective a year early. Unipalm has also just announced a service for the secure use of credit cards on the Internet to promote sales of goods and services.

The explosive growth initially depresses profits, because the cost of winning and handling customers exceeds first-year revenue. In the year to last Sunday, group profits are expected to be £400,000, with Pipex making a loss of around £900,000. But, as and when the growth rate of new customers stabilises, profits will also explode.

Unipalm's stockbroker, Henry Cooke Lumsden, published a note recently suggesting profits could reach £1.5m in 1995/96, followed by £2.3m then £6.7m, giving earnings per share of 22.lp and a price-earnings ratio in single figures at the current price of 170p.

US companies comparable to Unipalm are being floated on 10 to 12 times revenue. A similar valuation, based on Pipex's existing 600 customers, would take Unipalm's share price to 360p.

Unlike Unipalm, Datrontech is already solidly profitable and - at the current 168p - modestly rated on perhaps 13 times likely 1995 earnings if profits climb from an historical £4.4m to an expected £6.5m.

Competition in the personal computer market means that, to keep prices down, PCs are often sold with insufficient memory. This is where Datrontech comes in, as it sells the additional memory that users often need. The market in memory chips is expected to at least treble between 1993 and 1998.

Datrontech is reinforcing its strong position in memory chips by expanding into such areas as CD-Rom players and motherboards (computer "brains").