Although the U.S. stock market has soared since spring, few companies can match the meteoric rise of a small Internet company based in Omaha. Since May 1, the stock of KeyOn Communications Holdings, which provides Internet connections to companies and individuals, has climbed to $2.10 from 4 percent, an increase of more than 5,000 percent. No company in the Standard & Poor's 500-stock index or the Russell 2000 Small Cap Index came close to that over the same period.
Investors have bid up KeyOn's stock on hopes it will get a slice of the billions the federal government is doling out to expand broadband Internet service in the country. The company has applied for about $150 million in grants and loans, which KeyOn says it will use to expand its operations and improve its financial performance. Today, the company provides wireless Net service to 15,000 rural customers in 11 Western and Midwestern states. "We certainly weren't worth [just) 4 percent," says Jonathan Snyder, KeyOn's chief executive. "We have a real business with real customers and real product, and a business that can generate real cash flow."
But KeyOn isn't generating cash now, and it's far from clear the company will ever be able to deliver on investors' high hopes. The stock's run has been fueled by bullish comments from an analyst who has been paid by the company, a questionable practice that has not always been disclosed to investors. KeyOn is losing so much money that Snyder has had to sell stock eight times this year to cover its cash needs. And it's quite possible KeyOn will never see a penny of broadband money from the government, since requests for funds total seven times the amount of money available. One KeyOn competitor says Snyder, in essence, is betting his company's future on "winning the lottery."
Microcaps' Risks and Rewards
KeyOn is a prime example of the risks and potential riches in microcaps, typically companies with market capitalizations of less than $350 million. Investors have poured into the stocks of these companies in recent months, driving the Russell Microcap index up 75 percent since its low in March. Steven DeSanctis, small-cap strategist at Bank of America Merrill Lynch, says the best-performing small-cap companies are like KeyOn, with low market values, low share prices, and no profits.
KeyOn went public in 2007 and saw its stock hit $16 a share before it ran into the buzzsaw of last year's recession. As credit dried up and investors fled risky stocks, KeyOn shares dropped to $2 last May and pennies by end of the year. (continued...)
© 2009 Business Week Online under contract with MarketWatch. All rights reserved.
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