A wave of investor optimism pushed Checkfree Corp.'s stock price up 46% in the second week of October, but its shares are coming down to earth as some analysts worry about overvaluation.
The stock price was $25.50 at midday Friday, after rising as high as $29.75 the previous week.
Lehman Brothers Inc. is among the skeptics. Last week it downgraded its rating to "outperform" from "buy." An analyst reported that Checkfree's rise was fueled by a "perceived increase in demand" for its bill-processing services. Two weeks ago Checkfree signed a deal to help Chase Manhattan Corp. deliver bills electronically through the banking company's Web site.
An agreement between Intuit Inc., the maker of Quicken software, and the Integrion Financial Network, an influential home-banking consortium, also gave Checkfree shares a boost. Checkfree is seen as a likely Integrion processor, and if the Intuit deal spurs adoption of home banking it could help increase Checkfree's processing volumes more quickly.
"While both events are positive, neither announcement affects our revenue, earnings, or subscriber estimates for at least the next 12months," said the Lehman report, written by Patrick M. Burton.
Checkfree reported a loss of $5.9 million for its fiscal fourth quarter, which ended June 30. When its stock price hit $29.75 Oct. 10-an all-time high-Checkfree was trading at about 11 times Lehman's estimate of the company's 1998 revenues.
"Both the Integrion network and the bill presentment market have enormous potential but are just developing," the report said.
Many observers agree with Lehman's long-term bullishness about Checkfree. About 50% of the company's revenues come from services related to home banking and bill payments, and as the markets for such services heat up, Checkfree stands to benefit.
But Checkfree's dominance promises to be fiercely challenged by MSFDC, the bill presentment and processing venture of Microsoft Corp. and First Data Corp.
MSFDC's emergence means Checkfree needs to "focus on core areas by creating software and technologies to be competitive and leverage these into bill pay and presentment," said David Weisman, director of money, technology, and strategies at Forrester Research, Cambridge, Mass.
Some observers said they wonder whether Checkfree's work in areas such as loan origination, corporate banking, and investment-related services would distract it from the hot bill payment and home banking areas. Checkfree executives said it would not.
Peter J. Kight, chairman and chief executive officer of Checkfree, said its units may seem disjointed but actually complement each other nicely.
It is clear that MSFDC has trained its sights on Checkfree, which reaches about two million consumers through 275 banks, as the leader in bill-payment processing.
"Our principal competitor is Checkfree," said Darren Remington, general manager of electronic bill payment and bill presentment at Microsoft. "But our real competitor is the status quo-people paying bills the way they've always paid them."
Checkfree and MSFDC have very different business models. Checkfree favors consumer-initiated bill payment; MSFDC is biller-centered.
Checkfree's approach means it "doesn't have prime real estate value and the ability to resell," said Gary Craft, senior research analyst at BancAmerica Robertson Stephens in San Francisco. In effect, he said, its customers are not truly Checkfree customers but bank customers. "The real risk is disintermediation at the banking level," Mr. Craft said.
Mr. Kight said Checkfree is akin to an outsourcer, offering technology infrastructure to banks that have neither the time nor the resources to build their own.
"We link bank customers to banks, to mutual billers, and to companies receiving payments," said Mr. Kight. "We provide the infrastructure so all connectivity can ride on the bank's brand."
The key battleground is shaping up as bill presentment, observers said. MSFDC has clearly communicated it intends to deliver both bills and payments electronically, and Checkfree is moving to do the same.
Right now, though, half of Checkfree's business is done on paper. Consumers can initiate payments electronically, but most still receive regular paper bills, and Checkfree's payments of those bills are mainly of the "check and list" variety, which means a paper check is cut and mailed.
The deal with Chase gives Checkfree an important boost in its effort to move more billing and payments to electronic channels, analysts said.
"There is an important role for Checkfree in electronic presentment,"said Mr. Craft. "It's the same role Intuit (Services Corp., a processor bought by Checkfree) provided as a consolidator and that MSFDC, American Outsourcing, and National Processing Co. provide. Billers want concentrated sources," he said.
Checkfree also is considering building its own remittance processing platform, which means it could take a more active role in settling payment transactions with merchants.
"Currently we're the largest user of MasterCard's Remittance Processing Service, and we expect to continue to be so," said Mr. Kight. "We're discussing expanding RPS with MasterCard or ePay with Visa or looking at doing it ourselves."
