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Autonomy: Sturdy Net stock?
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December 5, 2000: 8:01 a.m. ET
Jury is out as CEO says stock, poised to join FTSE, is immune to tech woes
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LONDON (CNNfn) - One buzz phrase in investing is "buy what you know." Many Web surfers know what a struggle it can be finding information they want online, which might explain the ballooning share price of an Anglo-American technology company that says it offers refuge from the confusion of conventional searches.
Autonomy Corp. PLC provides systems that comb electronic records to find Web, e-mail, or database information. Not only does the Cambridge, England-based company trumpet its search systems as a breakthrough because "they work like the human brain", its founder also argues the firm's shares represent a relatively secure haven from the choppy market seas that many tech stocks now face.
Analysts' views on that claim are split. While plenty would urge investors to buy the stock, others warn that Autonomy's meteoric rise may be an indicator some European investors leap into tech stocks before they look and without knowing what they're getting into.
Autonomy (AU-) has ridden a 40-fold rise in its stock price since it went public just over two years ago, and is on the cusp of admission into  the blue-chip FTSE 100 index, barely a month after listing on the London Stock Exchange.
The stock jumped 201 pence, or 8 percent, Tuesday morning to £27.50. As of Monday's close, the company which is also listed on the Easdaq and Nasdaq stock markets -- was valued at £3.3 billion ($4.7 billion).
The bulk of the increase in Autonomy's stock took place when the shares were traded principally on Easdaq in the heady tech days of late 1999. Like many other Internet-related shares, it peaked in March 2000, setting a high of nearly £50 a share. Since then it has settled down, but it hasn't been a total bust.
"If you look at Autonomy's share price over time, it's been fairly immune to market sector movements, because investors who go into Autonomy tend to know why they are in: that they are in for the long term," chief executive Michael Lynch told CNN's Hala Gorani in a recent interview.
And last month, the company gave investors something to pin their faith on, posting a near three-fold jump in third-quarter revenue to $17.6 million. The period also delivered Autonomy's third straight quarterly profit, with a surplus for of $6.5 million, after a loss of $2.5 million a year earlier. For the whole of 1999, Autonomy reported a loss of $1.6 million.
The four-year-old Cambridge, England-based company is building its growth hopes on search systems that it says deliver better results because they work by understanding context and what the company calls "unstructured information", rather than by connecting bits of data. The mathematical basis for the technique was conceived by an 18th century Presbyterian priest named Thomas Bayes.
Autonomy's Dynamic Reasoning Engine the centerpiece of its systems has lured some big-name clients, including BP Amoco PLC, Ford Motor Co., or France Telecom SA. For corporate customers, the attraction is acquiring a software solution that helps them find information tucked away in the recesses of their databases or the Internet. The company's consumer search tool Kenjin (available for a free download at www.kenjin.com) hasn't yet taken off, analysts said.
Some analysts warn that a newer, increasingly popular technology has been threatening  to overshadow its systems, namely so-called "extensible markup language," or XML, which simplifies data searches and could erode Autonomy's market share. And if anyone's looking for signs the company may be rattled, Lynch recently sold $65 million in shares not normally a sign the boss is confident in the outlook for the stock, said analyst Derek Brown at Robertson Stephens.
"If [Lynch] thinks he's sitting on some great technology say, the next Oracle - then what the heck is he doing selling the stock?" asks Brown, who describes the shares as overvalued.
Edward Bridges, an Autonomy spokesman, said: "There's absolutely no link between the sale of shares and Mike's confidence in the company." Lynch said recently his sale of stock represented only about one-twentieth of his total holding in Autonomy.
"U.S. investors would have punished the company" for the CEO's stock sale, Robertson Stephens's Brown added. "Europe's investors don't take the time to check into technology companies."
To be sure, Lynch, an applied mathematician and son of a firefighter, has a vastly greater paper fortune: he has been touted in business magazine Management Today as one of Britain's first "Internet billionaires."
Nevertheless, Autonomy shares are not cheap. The shares trade at a sky-high 167 times next year's expected earnings per share, said John Segrich, an analyst at Goldman Sachs, one of the investment banks that spearheaded Autonomy's secondary market offering last month.
But plenty of analysts are upbeat. According to earnings estimates compiler Zacks, forecasts of next year's profit on average point to a rise of more than 90 percent to 21 cents a share. Three of five analysts in the Zacks poll have a "buy" rating on the stock.
"Autonomy is getting half of its sales in the U.S., has laid out a solid strategy with original equipment manufacturers, has a solid management team and market opportunity," added Segrich, who has an "outperform" rating on Autonomy shares. "It has had a premium valuation in the market, but it has been justified because of its track record of earnings growth."
Competitors breaking into Autonomy's domain include big-name technology companies such as IBM Corp. and Microsoft Corp., as well as niche players like Inktomi, a search engine company.
But Autonomy is spreading out its footprint, pushing its search functions into other realms, such as interactive TV and speech recognition. And it's starting to collect royalty revenues from makers of software that include search technology from Autonomy in their packages - a point not lost on analysts who hope revenue streams will be steadier.
"Unstructured information is common to just about every industry," said Segrich, who projects annual revenue at Autonomy will rocket to roughly $110 million next year. "This story has legs to support investors for quite a long time." 
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Autonomy
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