Internap: Stellar Performance Already Priced In

What follows is brief summary of my thoughts on Internap (IIP), after reading through the company's recently filed 10Q. Internap is one stock that has, to date, worked out exactly as I predicted. I recommended the stock late last year, on the premise that this chronic underperformer would appreciate significantly in 2006, as the company finally turned the corner on profitability on the back of a more disciplined new CEO and generally improving industry pricing dynamics. Not only has IIP delivered on these hopes, but the company has in fact far exceeded my expectations year-to-date, both from a business and stock price perspective.

During the most recent quarter, the company again reported solid cash-flow and customer growth and raised top-line growth estimates for 2006. Notably, the company's cash flow from operations is up a whopping 900% year-over-year and increased over 30% when compared to the just preceding March 2006 quarter. When one digs a bit deeper, it is clear that the company's much improved financial results are due almost primarily to the over 50% growth in IIP's data center business year-over-year. From the 10Q: "The revenue increase (i.e. in the June 2006 quarter) is primarily attributed to growth in new and existing data center customers, resulting in an increase in data center services revenue of $4.4 million. Customer growth is facilitated in part by the continued expansion of our available data center space as well as our continued efforts to bundle our IP and data center services."

So what's my perspective on IIP now given the continued solid results? As I've mentioned in the past, due to the already huge run up in the stock this year, I remain neutral on IIP's stock even considering the excellent financial results. It is important to note that since IIP's current growth is coming from the data center business, it would seem that the proper public comparable to IIP would be Equinix (EQIX).

My back of the envelope calculations (Note: I welcome any potential corrections here), have an Enterprise Value of about $1.4 billion for EQIX and estimated EBITDA for EQIX in the coming year at $100 million. This implies about a 14X EV/EBITDA multiple for EQIX. As for IIP, its EV is about $370 million and I assume about $25 million in EBITDA over the next year. That gives IIP a nearly 15X EV/EBITDA multiple.

Some may argue, of course, that IIP deserves a much higher premium to EQIX given IIP's several other growth opportunities in IP Services/Products, as well as, IIP's higher growth rate. However, I would note that IIP's growth rate is high because the company is working off of a much smaller base (i.e. negligible or zero profits in past years) and as such the current growth rate is not exactly sustainable. As regards to IIP's other growth avenues, the jury is still out, and as such I see no reason to assign a higher EV/EBITDA multiple at this time. All in all, IIP's stock appears fairly valued at the current level.

So what could move IIP higher? Aside from continuing to deliver solid cash-flow and executing well on new growth opportunities, I believe that IIP's stock price could increase significantly should management begin to leverage the balance sheet. Currently IIP has a measly $10 million in total debt. With the continued growth in data center revenues, the company's business is becoming mostly recurring in nature, and could support a much higher debt level. Without going through all the numbers in detail here, it seems obvious that IIP could borrow a significant amount of cash which could be used to acquire another company and/or buyback stock. Some may worry about such an aggressive balance sheet adjustment, but I think that given the company's solid results and the much improved industry outlook, IIP needs to start getting aggressive in maximizing its pristine balance sheet to grow the company and increase shareholder value.

IIP 1-yr Chart

Please Note: I first recommended Internap (IIP) at $4 (or $0.40 prior to the reverse split), 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.

Comments

[Saul Sterman:]

Nice call!
I owed you a 'good word' - or two - as some of our (CrossProfit) analysts got a bit carried away with some of your previous articles. They have since learned how to disagree more politely.

2006 Aug 10 10:05 AM