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An anonymous hedge fund manager submitted an article presenting the bull case on VitalStream (ticker: VSTH). His reasoning is presented in his own words below. Readers should take extreme care, as VSTH is a "penny stock"; and make sure to check figures, claims and data for themselves. This is not a recommendation from Seeking Alpha; corrections and disagreements welcome in the comments below:

VitalStream (VSTH) seems like its time has arrived; we own shares. The company is, as its name implies, focused on streaming video and audio content over the Internet. Simply put, the company allows anyone with content to become a broadcast station using the Internet. The Content Distribution Space is somewhat fragmented and is dominated by Akamai Technologies (AKAM). VitalStream has managed to build a business model which is dependent on keeping customers (Churn last quarter was 1%) not by price but by providing value added services and products like MediaConsole and a dedicated professional services department.

With the latest quarter management expects that capital expenditures for the network upgrade will be completed in Q4, profit margins should start to increase as the operating model build out is completed and fully staffed. Management will start issuing guidance at the end of Q4 2005. As a pure play streaming services provider the company is undervalued compared to AKAM.

TTM EV/Rev[*] Price($) FY 05 FY 06[†]
AKAM 19.75 9.4x 7.5x
VSTH 1.55 4.7x 3.4x

During the last earnings call, management indicated that the current quarter is going well and should be a record quarter. With strong growth in the sector and VSTH having been successful in developing a solid business model there is tremendous opportunity with this stock and the upside is just beginning. Here are some highlights based on coverage initiated by Merriman Curhan Ford & Co analyst Richard Fetyko:

  • Proliferation of broadband connectivity has led to the growing consumption of video and audio content online
    Differentiated service offering - MediaConsole and professional services, targets all customer segments, SMB / SOHO thru large enterprise
  • 1 – 3 year contracts - recurring subscription based revenue with 50% revenue growth coming from existing customers
  • Declining bandwidth costs and growing profit margins, positive Operating Cash flow expected early 2006
  • Company officers holding and not selling a significant portion of outstanding common stock
  • Experienced financial backers and board representation from Walden VC
  • With recent upgrade to network VSTH has the capability to stream Hi Definition formats
  • Additional opportunities exist with European markets and increasing bandwidth capacity of mobile networks

The company's balance sheet is in pretty good shape; it has $6.8 million in cash and $3.2 million in debt. There are 84 million shares outstanding on a fully diluted basis (18.6 million warrants and options giving the company an additional $9 million in cash at exercise). Company officers and insiders hold approximately 48% of the stock and have not been selling.

VitalStream went through a major network upgrade last quarter which swung EBITDA for 2005 to -$2,155 and Net Income of -$1.7 million. The company should have positive EBITDA within the first half of 2006 with positive earnings within the second half of the year.

Click on VSTH chart below to enlarge:

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Source: VitalStream Versus Akamai -- A Comparison (AKAM, VSTH)