A Broadband Player's Unorthodox Stock Play

Although the U.S. stock market has soared in recent months, few companies can match the meteoric rise of a small Internet player in Omaha. Since May 1, the stock of KeyOn Communications has climbed to $2.10 from 4 cents, an increase of more than 5,000%. No company in the Russell 2000 Small Cap Index came close over that 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. KeyOn has applied for about $150 million in grants and loans, which it says it will use to expand operations and improve 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 cents," 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."

NO GOVERNMENT CASH?But KeyOn isn't generating cash now, and it's far from clear it 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 money and has issued stock eight times this year to cover its cash needs. And it's quite possible KeyOn will never see a penny of government broadband money, since requests for funds total seven times the money available.

KeyOn went public in 2007 and saw its stock hit $16 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 yearend.

The company's fortunes began to change in mid-May when it hired John Liviakis, whose Mill Valley (Calif.) firm takes stock in companies in exchange for publicizing their prospects to investors. Liviakis says his goal has been to create a "national presence" for KeyOn, working the phones to his database of brokers and institutions. By the end of May, KeyOn shares hit 72 cents.

The stock has kept rising on positive comments from other supporters. Joseph Noel, an analyst with Emerging Growth Research, began issuing bullish reports and interviews about KeyOn in July. In one interview posted online in September, he said: "You're going to see this company awarded a lot of money." What he doesn't tell investors in the interview is that before he began covering KeyOn, it awarded him 75,000 restricted shares. Noel tells BusinessWeek that "if people ask, I'm very up front about [my financial stake]."

Michael W. Mayhew, chairman of Integrity Research Associates, which advises investors on research issues, says such financial transactions are a red flag. "The paid-for-research industry has a stink to it, of being biased, of maybe even being a scam," he says.

KeyOn CEO Snyder says Noel's analysis of his company has been "pretty evenhanded." He adds: "If [Noel]'s not properly disclosing, I don't think he's doing it maliciously."

It's almost impossible to know if KeyOn will get broadband money. In response to an online version of this story, Snyder argues his chances are good because of KeyOn's experience, technology, and partners. "All applicants are not created equal," he says. Yet experts say the odds of success for any company are long. "Because of the demand and the competition, there are going to be a lot of disappointed folks out there," says James Lightfoot, head of ACRS 2000, an adviser to companies on the application process.

For a response to this story from KeyOn's CEO, click here.

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