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[Nettime-bold] THE RAGAS REPORT: The Battle for Survival Among Web Hosters Heats Up


Title: RagasReport
Knowledge Capital For Next Economy Architects
Editor: Matt Ragas
"Now read by over 25,000 next economy leaders"


In This Issue  
  Commentary: Web Hosting Stocks: The Battle for Survival Among Web Hosters Heats Up
More Knowledge Capital: AT&T, Comcast, eBay, Yahoo and More
Quote of the Week: Forget about Beanie Babies, There's "No Stopping eBay" Right Now!

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This Week's Commentary

 

Editor's Note: In our ongoing effort to improve this report, we've decided this week to roll out Ragas Ratings, our new stock rating system. In an effort to steer clear of Wall St. analyst-speak, we've made the system very simple and straightforward. BUY, SELL or HOLD. That's it. They mean exactly how they sound.

Many readers email us each week after reading the Week's Commentary asking for particular stock picks and investment ideas. This new rating system will hopefully help cut to the chase in each report. After all, the bottomline for reading any investment related report is to hopefully make money! Lots of it.

As always, please email us with feedback and new ideas at: matt@ragasreport.com.


Web Hosting Stocks: The Battle For Survival Among Web Hosters Heats Up

Panic and raw fear all rolled into one.

That's perhaps the best way to describe the behavior of investors in the Web hosting sector over the past six months.

While it's clear that Web hosting will continue to hold its place as a cornerstone of the Next Economy, a flurry of recent reports suggest that demand for data center space is waning. Big time.

Even worse, some research firms are now projecting that up to 75% of all data center space available in North America will remain unsold. We're talking serious overcapacity if these estimates are correct.

So far, though, it remains to be seen if these dire estimates are anywhere close to being right. Regardless, this still hasn't stopped Wall St. from turning the remaining Web hoster stocks into walking pariahs.

To be fair to these pessimistic investors, closely held Web hosting player Colo.com has indeed already filed for bankruptcy protection and ISP PSINet, another big Web hoster, has officially called it quits as well.

Big deal I say.

In my mind, the fundamental value proposition behind the outsourcing of a company's Web operations is still incredibly strong and getting stronger. Web site and applications hosting isn't going to suddenly shrivel up and die.

This is a sector still with ALOT of growth ahead. My only real fear is that many Web hosting shops are backed with tremendous amounts of debt to manage. Some will collapse under the weight and others will be absorbed.

But there will be winners out of this mess.

With this in mind, I decided to take a look this week at Exodus, Loudcloud, and Globix, three of the remaining independent Web and applications hosting stocks.

After putting the group under my analytical microscope, let's see what I could find out.

Loudcloud [LDCL]

Even the blessing of Netscape founder Mark Andreessen doesn't seem to go as far as it used to. Everyone seems fallible these days. Co-founded by Andressen and a team of Netscape and AOL veterans, infrastructure services provider Loudcloud has struggled severely since coming public in early March of this year at a lowly $6 per share. Realistically, though, given the abysmal IPO market and Loudcloud's extremely short operating history, it's a wonder that this company was even able to get public in the first place!

Loudcloud shares are currently hovering around $2 bucks after the firm recently reported a shaky first quarter. In addition to laying off 122 employees, Loudcloud announced lowered revenue projections for the remainder of the year, which prompted quick analyst downgrades. Loudcloud now expects sales of $53-$57 million and a loss of $129-$132 million for the remainder of the year. On the plus side, company CEO Ben Horowitz continues to tell Wall St. that Loudcloud has a "fully-funded business plan." So far, Wall St. is mixed on these claims and screaming "show me!"

While LDCL still sports negative margins right now, there are indeed clear long term advantages to the fact that the firm leases- and doesn't actually own- data center space. This firm shouldn't end up drowning in debt like some Web hosters! In addition, Loudcloud continues to quietly rack up major new customer wins like Fox, Ford Motor, USA Today and Blockbuster. Given Loudcloud's strong management and marquee backing, this firm looks like a survivor. Investment wise, though, this is a stock to avoid for the next few quarters, until LDCL moves closer to cash flow positive.

Ragas Rating: HOLD


Globix [GBIX]

Founded in the pre-Web days of 1989, Web hoster Globix has quietly built up a strong reputation as a reliable Internet hosting and applications services company. Headed by company founder Marc Bell, Globix has so far maintained its independence and now operates data centers in London, Santa Clara, New York, Washington D.C. and Atlanta. With more than 72% of the company's revenue now being generated from enterprise customers (non-dot coms), Globix now boasts arguably the most secure revenue mix among the Web hosters.

While pundits continue to talk about a glut of data center capacity, CEO Bell estimates that Globix's data centers are currently operating at 95% capacity. In addition, the firm recently announced that it had signed roughly $25 million in aggregate new contacts in the past three months. For the most recent quarter, sales jumped 50% to $26.8 million while GBIX's EBITDA loss declined 22% to $12 million. While this is good progress, I am still shaken by the fact that Globix paid almost $11.7 million in interest expense last quarter alone.

For fiscal 2001, Globix now estimates that lease payments, working capital and capital expenditures will total $160 million. Suddenly, the $217 million in cash that GBIX ended last quarter with doesn't sound so impressive. At a recent price of $1.60 per share, Globix is trading for only one-third of its cash value and less than one-times its expected 2001 sales ($100-$105 million). Clearly, Wall St. is currently betting against this company's survival. GBIX's debt load is indeed a frightening site in a frigid fundraising environment. I'll pass for now.

Ragas Rating: HOLD


Exodus Communications [EXDS]

Banking on the demise of Web hosting giant Exodus seems to be a favorite past time of analysts these days. In fact, over 20 analysts now have a HOLD rating (read- sell) out on the stock. Let's not forget that over a year ago, Exodus was THE toast of the Street. When it came to investing in "Net infrastructure"- EXDS was the play of choice among fund managers. So what went wrong? A combination of data center overcapacity fears, sudden executive departures at Exodus and a frightening cash burn- all bunched together- have left investors spooked.

I have to admit that I can't blame investors for driving Exodus shares from $10 or so down to only $1.20 in the past three months. With a $3.4 billion mountain of debt to service and only $550 million in cash on hand (as of June 30), it's easy to bet against EXDS right now. But let's look at the plus side. With 40 data centers around the world, Exodus is the world's largest Web hoster. Even with quarterly interest payments of $75 million and increased competition, EXDS is still an incredibly invaluable asset for traditional telecom firms to own.

While investors are acting like Exodus is headed towards bankruptcy, company CEO Ellen Hancock maintains that the company is fully funded to reach breakeven by the third quarter of next year. In addition, former BMC Software and McDonnell Douglas exec William Austin joined the firm as CFO earlier this week. Clearly he thinks EXDS can make it. I'm going to go out on a limb and agree. At a recent market cap of $665 million and with $1.4 billion in sales projected for this year, Exodus' valuation just looks too tasty to pass up.

Ragas Rating: BUY

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Buy It Here!
More Knowledge Capital

 

ANOTHER BLOWOUT QUARTER FROM EBAY: eBay is simply an amazing company. There's really no other way to describe the online auction gorilla these days. While former Internet heroes like Yahoo [YHOO], Amazon.com [AMZN] and Priceline [PCLN] have all wilted over the past year or so, eBay continues to party like its still 1999 (think NASDAQ 5000!). While the rest of the dot com world has been forced to deal with earnings warnings and massive layoffs, eBay has managed to maintain its lofty stock price and actually raise its earnings projections. Kudos Meg Whitman!

On Thursday after the bell, eBay announced earnings before charges of $33 million or 12 cent per share, significantly better than the 9 cents that Wall St. was expecting. eBay now expects to report total sales for the year of between $720-$735 million and earnings of up to 44 cent per share. Based on these estimates, at a recent price of $64.40, eBay checks in with a nosebleed-like forward P/E of around 150 or so. While this would appear to be a valuation out of whack with the realities of the rest of the market, I would never bet against eBay's momentum.



Buy It Here!

AT&T TRIES TO PRIME A BIDDING WAR: Last's week's $40 billion unsolicited bid by cable giant Comcast [CMCSK] for AT&T Broadband [T], the cable arm of Ma Bell, surprised very few cable industry insiders. After all, it was pretty clear that AT&T chief C. Michael Armstrong had been quietly making it known (contrary to public statements) that his cable assets were available at the right price for a while. On Wednesday, AT&T's board rejected the bid calling it "inadequate" and announced that it would explore "strategic and financial alternatives" for the unit.

Clearly, AT&T doesn't really plan to spin-off the broadband unit into a separate company and is now hoping that a bidding war ensues. Unfortunately for Armstrong, I think he's going to be stuck with the Comcast bid. In the current market environment, it's doubtful that someone like Disney [DIS], Charter [CHTR] or Cox [COX] will step to the plate with its own bids. Cable tycoon John Malone is also staying quiet. For Comcast this would be a particularly sweet deal. After all, let's not forget that it was Ma Bell that nudged out Comcast in a bidding war for Media One over two years ago. Revenge is always nice.

Quote of the Week


``The valuation is high, but as long as the company is growing like this, people are going to ignore the valuation. It is a very valid point that anything that looks so good maybe can not be that good, but for now there is no stopping eBay.''

-- Comments made this week by Piper Jaffray analyst Safa Rashtchy after auction giant eBay announced stronger then expected quarterly results.




 
July 20, 2001


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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About Matthew W. Ragas: Ragas is President and Chief Analyst of Matthew Ragas & Associates, an Orlando, FL based strategic advisory and venture development firm. He was previously the founding editor of Raging Bull and is the author of the new e-business book Lessons From the E-Front from Prima Publishing.


DISCLAIMER:
The RagasReport and Matthew Ragas and Associates, are not a registered Investment Adviser or a Broker/Dealer. Readers are advised that the report is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy. The opinions and analyses included herein are based from sources believed to be reliable and written in good faith, but no representation or warranty, expressed or implied is made as to their accuracy, completeness or correctness. Readers are urged to consult with their own independent financial advisors with respect to any investment. All information contained in this report should be independently verified with the companies mentioned. In addition, we receive no compensation of any kind from any companies that we mention in this report.




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