Merrill's Blodget Back on Inktomi Bandwagon

The analyst raised his rating on the company, reversing an October downgrade.
Author:
Publish date:

Merrill Lynch's Henry Blodget downgraded Inktomi (INKT) back in October. Since then, the stock has nearly doubled. Today, Blodget did an about face, upgrading his near-term rating on the stock to accumulate from neutral.

Inktomi was up 16 1/2, or 9.4%, at 193 in early trading in what has been a mixed day so far for Net stocks.

TheStreet.com Internet Sector

index, which includes Inktomi, was up 10.88, or 1%, at 1158.98.

Blodget downgraded Inktomi following release of its fiscal fourth-quarter numbers, by most accounts a solid report, on Oct. 21. Shares tumbled on Oct. 22, closing down 17 7/16, or 14.5%, to 103 1/16, and subsequently fell as low as 93 13/16 on Oct. 27 -- with Blodget's downgrade certainly playing a role in the losses. It recovered and soared along with the rest of the Net sector, reaching an all-time high of 186 on Tuesday.

Giving Blodget the benefit of the doubt, maybe a lot of things have changed since he downgraded Inktomi. In fact, one of the key reasons he gave at the time was valuation. He noted that Inktomi was trading at "nearly 50 times" his revenue forecast of $145 million for 2000. In his note today, Blodget wrote that his price objective of 225 reflected 48 times fiscal 2001 revenues. But he also noted that Inktomi was trading "at a discount to leading infrastructure companies with similar revenue growth rates."

Blodget even addressed his October downgrade in today's note, writing that it "was prompted by concerns over 1) a weakening balance sheet and 2) rising expenses in the face of an increasingly competitive enterprise market." But he backpedaled from there, writing "these concerns may have been overly conservative."

"We expect FY 1Q 2000 to provide evidence of a strengthening balance sheet," wrote Blodget. "The company has also since made several enterprise-related announcements which fortify its position in this rapidly growing segment," mentioning deals the company has made with

Exodus

(EXDS)

and

Digital Island

(ISLD)

.

While traders are undoubtedly paying attention to Blodget's comments today, you would have been wiser to listen to other analysts on this one. On the day of the downgrade, both

Bear Stearns

analyst Robert Fagin and

Hambrecht & Quist

analyst Daniel Rimer told

TSC

they viewed weakness in the stock as a buying opportunity. And most other analysts were indicating the same thing. Note that both Merrill and H&Q did underwriting for Inktomi. Bear Stearns has not.

Inktomi was certainly a bright spot in an otherwise mixed morning for Net stocks. Among other standouts was

Commerce One

(CMRC)

, up another 32, or 5.8%, to 582.

TSC

columnist

Adam Lashinsky

wrote about a 1,000 price target on the stock

yesterday.

Internet incubators

Internet Capital Group

(ICGE)

and

CMGI

(CMGI)

were taking a breather today after a huge week. Internet Capital was off 5 3/8, or 3%, at 187 1/2 in recent trading. CMGI was off a modest 3/8, or 0.1%, at 275. Note that investors have been seeing losses in hot stocks like Internet Capital and CMGI as buying opportunities.