The situation at Internap (INAP) is fairly simple: The company is undergoing a major transformation in 2007 due to the acquisition of VitalStream.

Putting aside all the various business justifications for the purchase as detailed in Internap’s S-4 filing, the primary reason for the acquisition, as we have stated in the past, is that Internap and VitalStream management are attempting to provide Wall Street with an alternative to Akamai.

And who can blame them? With Akamai trading at approximately 35X+ Enterprise Value (EV) to 2007 EBITDA and over 15X EV to 2007 Sales, a successful competitor could seemingly see a significant appreciation in its share price.

In the case of Internap, post the VitalStream purchase, the company is looking to have about 50 million shares outstanding, $240 million in 2007 revenue, $35 million in EBITDA, and about $100 million in net cash. Putting that all together and applying an Akamai-like valuation to the business (ex low-margin revenue streams), implies a potential upside target to Internap (INAP) of between $25 – $30 per share.

The question, of course, is whether Akamai’s, seemingly obscene, valuation is at all sustainable? Unfortunately, nobody has an answer to that question, which is why we caution that investors in Internap prepare themselves for continued volatility in Internap’s (INAP) stock price over the next year.

As for us, we’re holding onto our INAP shares, primarily because we’re optimistic on the IP Services/Managed Hosting sector over the coming years, and we see little reason for a sustained collapse in share prices. We also suspect that INAP’s numbers in 2007 could exceed the above estimates, given management’s propensity for conservative financial guidance. At the same time, the high valuations throughout the sector (i.e. AKAM, EQIX etc.), suggest that share gains in 2007 maybe more subdued than in past years.

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.