There is no doubt that Internap’s earnings report last week was simply exceptional. But, of course, “The Market” is always looking to the future, which is why INAP’s projected results are far more important to investors than past reports.

So what’s in store for 2007? Last week, the company announced the following forecast for 2007:

“Revenue guidance of 30% for 2007, which includes the acquisition of VitalStream Holdings, Inc.; Full year adjusted EBITDA is expected to be in the range of $34 to $37 million; Full year expected adjusted gross margin to be approximately 50%; and Capital expenditures are expected in the range of $15 – $20 million. “

Interestingly, this guidance almost exactly matches the forecast we provided in this past post. However, if the past is any guide, Mr. Deblasio, Internap’s CEO, has low-balled Internap’s top and bottom-line prospects in the coming year, especially since the above forecast seems to imply zero growth in the VitalStream/CDN business in 2007, an outcome which seems to us to be highly improbable. Therefore, it seems highly likely that Internap executives will revise their guidance sharply upwards as the year progresses.

The question, though, is whether such revised guidance will help boost the company’s share price.

In all honesty, since we can’t predict the movement of stock prices, we’ll have to plead ignorance on this issue. However, we would remind investors that the valuation of Internap is best approached by reference to the two heavyweights in the company’s industry: AKAM and EQIX.

To the extent that these two companies retain their extraordinary high absolute valuations, it seems likely that Internap’s share price will provide market-beating returns in the coming year, especially if guidance is revised upwards, as we expect.

But, if the ever changing “Market” decides to shift capital away from these highly-valued, and much-hyped, equities, into more attractively-priced tech securities, it’s difficult to see how Internap’s stock price will perform well in this type of environment.

The bottom-line is that we believe that Internap, and many of the other stocks in the IP Services sector, are no longer undiscovered or undervalued on an absolute basis. Therefore, we think that one has to approach these stocks with caution, as the risk/reward is no longer as favorable as it once was.

Please Note: We first recommended Internap (IIP) at $4.00 per share, and still hold a position in the stock. 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.