|
Content Delivery
Stocks: Inside the Net's Traffic Cops
Forget about
the dozens of failed broadband entertainment startups that we've
all seen flameout over the past 18 months. Let's not even focus
on the struggling remaining new media firms like Salon [SALN]
and TheStreet.com [TSCM] for a second.
This is NOT
where the real growth for broadband content and applications is
likely to originate from in the next year or so. Look inside of
your own companies. Broadband content, services and applications
are alive and well inside the enterprise. Thriving in fact!
Of course, with
the dot com bubble burst, most investors still think of broadband
content (and all of its related sectors) as being dead and buried
for at least the time being. Not surprisingly, stock valuations
in the content delivery and caching sectors have been obliterated.
Once towering
giants like Akamai [AKAM] and Inktomi [INKT] have
been brutally chopped down to size.
Clearly, a year
or so ago, we felt that the content delivery sector was still hopelessly
overvalued. This area was "froth central" in our book.
Now, though, when we look through the caching wreckage we find an
entirely different story.
Let's be clear.
We've never questioned this group's business models - or essential
place in the Net infrastructure food chain- just this sector's valuations.
After all, research shops like the Aberdeen Group still see
digital content delivery as a $6 billion business by 2005.
With this in
mind, we've decided to play the contrarian role as usual and put
three of the most well known content delivery and caching names
under our analytical microscope for this week.
Let's see what
we could find out.
Inktomi [INKT]
Lots of questions,
but very few real answers. This is the tough situation that Inktomi
investors face right now. After all, in less than 18 months, Inktomi
has gone from being the poster child of "Internet infrastructure
stocks" to a troubled network software shop struggling to re-gain
stability among its end customers. Today, Inktomi's operations can
essentially be divided into two core businesses: network products
(think caching software) and portal services (i.e. search engine
solutions).
For the fiscal
third quarter, Inktomi's pro forma sales dropped 31% to $39.6 million
and the company reported a loss of $21.4 million or $0.17 per share.
To understand just how rapidly Inktomi's business has deteriorated,
the firm posted a profit of $4.1 million this same time last year.
On the plus side, Inktomi was able to sign up two important new
content networking clients in Williams Communications and
PanAmSat during the third quarter. In addition, Inktomi added
computer giant Dell [DELL] as a new OEM hardware partner
during the period.
At this point,
it's hard to tell if the worst is really over for Inktomi. While
the firm already laid off 25% of its workforce back in April, company
CEO David Peterschmidt has so far declined to offer any future
guidance. Not surprisingly, 16 of 23 analysts currently have a HOLD
on INKT's shares. At roughly $4 bucks a share, Inktomi currently
checks in with a $550 million market cap and over $215 million in
cash still on hand. Unfortunately, until Inktomi can show its business
improving again, I'll sit and watch this mess from the sideline.
RagasRating:
HOLD
Akamai [AKAM]
Akamai (which
is a Hawaiian word that means "clever") certainly hasn't
lived up to its name lately. In fact, the content delivery player's
shares have plummeted a staggering 95% over the past year! Much
like Inktomi, Akamai shares have been tossed into the gutter as
of late. Stock price aside, though, the fact remains that Akamai
now operates the largest content delivery network on the planet.
Akamai's network has now grown to over 11,600 servers in over 60
countries.
More importantly,
Akamai is so far keeping its promises on the financial front. Akamai's
sales jumped 137 percent to $43.1 million in the second quarter,
while the company's EBITDA loss narrowed sequentially from $36.5
million to $26.5 million. In addition, the firm's gross margin increased
from 59% to 68% quarter-over-quarter as well. While this is obviously
still not a firm on the brink of profitability, we are encouraged
by Akamai's narrowing losses and promises of hitting cash flow break
even by the second quarter of next year.
Valuation wise,
we like what we see right now in AKAM. At $4.50 per share and with
a $512 million market capitalization, Akamai is trading for less
than two times next year's projected sales ($290 million). Having
ended last quarter with $267 million still in the bank and $25 million
in vendor financing available, we believe Akamai holds a "fully
funded" business plan. In addition, Akamai's new EdgeSuite
service has so far received great initial acceptance in the marketplace
(75 customers to date). Forget the naysayers. We're placing our
bets now!
RagasRating:
BUY
CacheFlow
[CFLO]
While the company
is a virtual unknown compared to the likes of Inktomi and Akamai,
CacheFlow has nevertheless carved out a solid niche in the content
networking business. In fact, IDC recently announced that
CacheFlow was the worldwide market share leader (35.2%) in caching
appliances for 2000. Caching appliances essentially are used by
enterprise customers and ISPs to speed site response times and handle
traffic surges. In addition to its hardware business, CacheFlow
is becoming increasingly focused on content delivery software solutions.
So far, CacheFlow
has largely managed to tread water amidst the current IT spending
slowdown. Sales drooped from $22.4 million to $20.4 million in the
most recent quarter as  the
pro forma loss for the period widened 78% to $8.4 million. CacheFlow
has reacted to the slowdown by firing 18 percent of its 500-person
staff and now believes that it can reach operating breakeven at
about $30 million in quarterly revenue. While the company has reiterated
its commitment to return to profitability, it's a crapshoot guessing
how soon this might happen.
This much we
do know. The caching king ended last quarter with over $68 million
in cash and short-term investments still on hand. This is a management
team that has tasted profitability previously and still has a nice
cash cushion to work with. In fact, at a recent price of $3 bucks
per share, CFLO is now sitting with more than half of its value
in cash. Sales are still expected to grow 5% to $103 million this
year. Okay. Let's review. Over $100 million in sales, a $130 million
market cap, smart cost cutting, a healthy cash position and no debt.
Sign me up!
RagasRating:
BUY
|
