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Internap (INAP): Looking Ahead

Posted on November 7, 2006

It’s hard to believe that it’s been almost a year since we first recommended Internap (INAP) at a split-adjusted price of $4. Back then pessimism concerning Internap’s future was clearly in fashion, as the company struggled to prove the economic viability of its business model. Fast forward one year, though, and Internap has suddenly become a Wall Street darling.

The company has not only turned the corner on profitability, but has continued to exceed analysts’ expectations on both the top and bottom-line. Shares, which a year ago could be had for less than 1X sales, have rallied over 300% on the back of strong growth in revenues, new customer acquisitions, and most importantly cash-flow. The company has clearly proven that there is huge operating leverage in its business model.

The Internap story demonstrates once again how quickly fortunes change in the stock market, and why value investors, such ourselves, simply need to have patience when investing in low risk situations, where we face little permanent
capital loss based on a careful evaluation of financial and business risks. If there is little risk, time is on our side and the upside will eventually take care of itself.

So where is Internap headed now? While the shares are clearly no longer in deep value territory, there’s still potential upside left, as a different set of investors begin considering the stock. Presently, all eyes are on the company’s VitalStream acquisition, which should enable Internap to capitalize on the growing demand for content delivery network services, a market currently dominated by Akamai (AKAM). Should the company be able to successfully integrate VitalStream and begin upselling current clients on the VitalStream solutions, it seems clear, based on relative valuation comparisons to Akamai (AKAM), that Internap’s stock could continue to perform well in 2007. In addition, Internap’s pristine balance sheet, should allow management to aggressively pursue additional acquisitions in the Managed IP Services space. Interestingly, Savvis’s (SVVS) CDN business appears to be up for sale and would make an excellent fit for Internap.

Overall, since success breeds success, we remain confident that Internap (INAP) will continue to be an exciting company to watch in 2007 and we are holding on to our shares. At the same time, the company is no longer our top IP Managed Services value pick for 2007. That honor goes to FiberNet Telecom (FTGX), a small broadband transport and co-location services company based out of New York City. The company recently reported it’s first free cash-flow positive quarter in its corporate history and we think 2007 will continue to be a year of upside surprises for FTGX shareholders.

Disclaimer:
We own shares in Internap and Fibernet. This site may include market analysis. 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.

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Disclaimer:
This site may include market analysis and we may own shares in the stocks mentioned in our reports. 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.

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