While Inktomi Suffers, the Net Sector Moves Ahead

It only takes one rotten apple to spoil the bunch.

That's what Inktomi (INKT) was finding out early today. It reported what by all accounts were solid earnings Thursday, but it faced a downgrade by Merrill Lynch. Merrill downgraded its intermediate-term rating on the provider of Internet infrastructure software and services to neutral from accumulate, though it maintained a long-term buy rating. Inktomi was off 15 1/2, or 13%, at 105 in early trading.

However, the sector as a whole was faring well in early trading. TheStreet.com Internet Sector index was lately up 10.03, or 1.4%, at 728.99.

Net/Tech Indices INDEX CHANGE % VALUE TSC Internet 10.03 +1.4% 728.99 TSC E-Commerce 1.51 +1.5% 102.89 TSC E-Finance 1 25/32 +3.2% 57 9/16 Nasdaq 31.90 +1.1% 2833.80

Inktomi reported a fiscal fourth-quarter loss of 9 cents a share, which was a penny ahead of estimates. Merrill analyst Henry Blodget admitted Inktomi "had a strong quarter," but downgraded the stock due to valuation (since when does that matter to Blodget?) and "a significant increase in our operating loss estimates" for fiscal year 2000. Though he indicated that Inktomi "is still the clear leader in Internet infrastructure software and services," he also wrote that with new competitors and new opportunities, Inktomi "appears to be having to invest more in sales and marketing and product development than we expected to maintain its leadership position and growth rate."

As for the valuation, Blodget contended that valuation was usually not a factor when "hyper-growth" companies such as Inktomi are significantly exceeding top- and bottom-line forecasts. But he noted that Inktomi was trading at "nearly 50 times" his increased revenue forecast for the year 2000 of $145 million. What hurts even more is that Merrill has done underwriting for Inktomi.

Merrill was the only brokerage firm we saw that downgraded Inktomi. CIBC World Markets reiterated a strong buy rating on the stock. Analyst Martin Pyykkonen did not share the same concerns as Blodget, writing that his price target of 150 was based on "about 55 times our 2000 revenue estimate of $150 million."

Pyykkonen told TSC it's hard to make valuation calls on any of the Internet stocks, let alone one that is growing as fast as Inktomi. "I don't by any means think it's fair to be singling out Inktomi's valuation because there's still a lot of upside going forward," he said.

Bear Stearns and Hambrecht & Quist both reiterated buy ratings on the stock. Bear Stearns analyst Robert Fagin and Hambrecht & Quist analyst Daniel Rimer both told TSC they viewed weakness in the stock this morning as a buying opportunity. H&Q has done underwriting for Inktomi.

Among other companies that reported on Thursday, Exodus Communications (EXDS) was up 5 3/8, or 7.5%, at 78 7/8 after its earnings report. Morgan Stanley Dean Witter upgraded the stock to strong buy from outperform with a price target of 120, saying the company "was firing on all cylinders at home." Morgan has not done underwriting for Exodus. Analyst Jeffrey Camp increased his year 2000 revenue estimate by 35% to $618 million.

Exodus reported a loss of 29 cents, which was in line with estimates for its third quarter. Camp wrote that Exodus "stands at the apex of a significant upswing in demand for hosting and related services." And "despite impending competition from new players in the industry," he wrote, "Exodus holds a competitive position that will allow it to gain the lion's share of demand," noting that the company won more than 80% of the contracts that it bid on in the third quarter.

Also, CNet (CNET) was seeing profit-taking from a pre-earnings run-up after it reported a loss of 32 cents a share, 1 cent better than estimates. It was down 4 1/8, or 8%, at 49 7/16.

Also seeing some post-earnings profit-taking was Phone.com (PHCM), down 21 5/16, or 8.6%, at 227 1/4 despite besting earnings estimates. Phone.com reported a loss of 16 cents in its fiscal first quarter compared with the 23-cent loss estimate from First Call/Thomson Financial. But the stock had gained about 50 points this week in advance of the report, so traders were taking advantage of the run-up to get out.

In nonearnings-related news, shares of barnesandnoble.com (BNBN) were up despite news from Amazon.com (AMZN) that it had filed suit against its rival over patent infringement. The suit claims barnesandnoble.com illegally copied Amazon's 1-Click technology that allows customers to shop without multiple steps or re-entering their shipping and billing information every time they buy. The suit seeks a permanent halt to the feature, while also asking for an unspecified amount of damages. Amazon was up 1 13/16, or 2%, at 82 9/16 in recent trading. Despite the announcement, barnesandnoble.com was up 1/4, or 1.4%, at 18 5/8.

Finally, shares of NetZero (NZRO) were up 4 13/16, or 25%, at 23 13/16 after Goldman Sachs upgraded the stock to trading buy from market outperform. Analyst Michael Parekh wrote that he expected a "string of upcoming catalysts as early as next week with the earnings release and launch of addition revenue streams" that were not included in their model. Goldman Sachs has done underwriting for NetZero.

>To order reprints of this article, click here: Reprints