Internap (IIP) Valuation Considerations
Posted on February 9, 2006
Two of Internap’s closest comps have just reported earnings, and it is interesting to compare their valuations to Internap to see the potential value of Internap, in the event of a takeover (I wish management would just put IIP up for sale already). Note that these calculations are very back of the envelope and somewhat simplistic. But, I think they give a good idea of the potential for Internap’s stock.
First off is Akamai (AKAM):
Akamai has about $280 million in annual revenue and a 80% gross margin. The company is valued at about 13X sales. (I’m ignoring any debt here in doing the relative valuations, because all the companies have negligible net cash positions as it pertains to the valuations).
Next up is Equinix (EQIX):
Equinix has about $210 million in annual revenue and a 34% gross margin. The company is valued at about 5X sales.
The difference in the gross margins and valuations of AKAM and EQIX relate to the different business models. AKAM is more of a software/application performace-type play, while EQIX is a pure managed hosting company. Interestingly, IIP operates in both these segments.
Internap’s IP Services business (most similar to Akamai’s) will do around $105 million in revenues. Internap’s Managed Hosting/Co-Location business (most similar to Equinix’s) will do around $35 million in revenues. It is nearly impossible to figure out the gross margins on each specific business here, because IIP does not break out costs by business segment, but overall IIP is sporting around 34% gross margins. The company’s margins are quite low, since it has yet to reach the type of scale already achieved by AKAM, but it is quite obvious that with additional revenue growth, margins can expand dramatically.
Now looking at the relative valuation, (again this is very back of the envelope), IIP’s Internet Protocol business should be valued at at least 2X revenue or $210 million. The company’s managed hosting business, which is growing quite nicely, should be valued at 3X revenue, at least, or about $105 million. So putting those two together the value of IIP’s business should be worth about $315 million or $0.91 per share. Of course, you could also slap on a 5X multiple (same as EQIX) and assume a valuation of $2 per share. In the worst case, slap on a a 1X multiple (to account for IIP’s dismal business performace) and you get a valuation of $0.41. Assigning probabilities to the above scenarios (50% for $0.41, 40% for $0.91, 10% for $2) and you get a value for IIP of about $0.75 per share, or 55% above the current price.
In sum, the risk/reward on IIP still appears very favorable. Granted the company has been a real dog over the years, but it remains a takeover target, simply because the company has a solid base of customers and the valuation of the business is way beneath that of comparative businesses. One could argue that the discount is warranted, but I think the discount is way too high, especially when one considers that IIP’s customer base and product offerings are solid and that as part of a larger company, IIP would likely benefit from greater scale and thus higher margins.
Put in another way, when looking at IIP’s stock at this level, you have about a 50% chance of a 17% loss in capital and a 50% chance of at least making 50% gain on your money in the next 12 months (I don’t expect IIP to stay independent for that much longer). That’s a good gamble.
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I like the analysis (although quite general). Makes sense that a strong business should trade at par with comps. Looking at the industry and the Company… they do seem like a great takeover target. Why isnt managment (if they are not) …thinking along these lines?
Management may very well be thinking along these lines. The new CEO was just hired a couple of months back, so it will take some time to see what his plans are. As an aside, Vonage, a client of IIP just filed for an IPO. This is just another instance of IIP’s high-profile customer base.
Speaking of Vonage (in your post above..) - realizing that an IPO of Vonage would create a buzz in the VOIP market… do you see any players in this market that have been sluggish and are undervalued. I would thnk that an IPO of Vonage would “high profile” other Companies in the same sector, and would give them a boost.
Should we anticipate a casinocapitalism post in this sector in the near future?
Looking forward to the next pick…
I see that IIP has surparsed your price target of .60 Would you recommend to sell at this point? Looking at the technicals of the stock movement in the past year, there have been major drop-offs in price after a big run-up.
-K