Yesterday, INAP delivered earnings results which demonstrated a significant improvement in profitability, as I had expected. Notably, as the company mentioned,

“Adjusted EBITDA was $9.9 million representing growth of 114 percent and 10 percent compared with the first quarter and fourth quarter of 2009 respectively. “

So why was the stock down significantly? Well, I don’t like to speculate on the irrationalities of Wall Street, especially during a Market correction phase, but I guess speculators were disappointed with the company’s lack of revenue growth, especially the decline in IP services. Wall Street has an obsession with revenue growth, as opposed to profits. But the revenue decline was of course expected in this case, since INAP is slowly transforming into a data center company, as opposed to an IP services business. The data center strategy is a excellent long-term business direction and one which I always felt INAP should pursue. However, big changes take time, especially when your dealing with data centers. Importantly, on the data services front, the company’s prospects still look good, with the company’s data center expansions set to go live in Q3 2010. At that time, or shortly thereafter I expect revenue to accelerate and for profits to continue to expand at INAP.

Interestingly, I went thru a similar situation with Fibernet Telecom (formerly FTGX) awhile back. Fibernet embarked on a colo expansion strategy which took some time. During the expansion phase, the stock basically went nowhere, but once customers started filling up the new colo space, and the company demonstrated demand, Fibernet became an acquisition target and ultimately sold for a significant premium.

I expect that the same thing will happen with INAP. So those with patience to wait for INAP’s data center expansion to take root, should benefit from a higher share price over the next 12 months, as I’m certain that a successful execution of the data center expansion will make INAP an attractive acquisition candidate.

Disclosure: Affiliates of Envoy Global Research, and its principals, own shares in INAP. All ideas, opinions, and/or forecasts, expressed or implied herein, are for informational purposes only and should not be construed as a recommendation to invest, trade, and/or speculate in the markets. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise.