Managed applications lead Net sector

Web hosting stocks lead Net sector

Attention grabbers: USinternetworking, Globix, Digex

By Bambi Francisco, CBS.MarketWatch.com

Last Update: 12:07 PM ET Jun 9, 2000

SAN FRANCISCO (CBS.MW) – After Thursday’s mixed session, Internet stocks found direction Friday as shares of most Net leaders participated in a run-up kicked off by hosting and managed application service providers.

Fresh signs of benign inflation also provided a cushion beneath the group.

The Goldman Sachs Internet Index added 0.2 percent to 501. Barring any huge spills, the Net barometer is expected to end the week with a modest gain. This, however, follows last week’s euphoric 28-percent surge, the best-performing weekly gain ever.

The American Internet Index added 0.9 percent. The Internet infrastructure Holdrs, which is listed on the Amex, rose 1 percent in the early going. The Nasdaq Composite rose 49 to 3,875.

Ebay rose 1 7/8 to 73. Amazon.com added 5/8 to 52 1/2. Amazon.com is pursuing opportunities for expansion in Europe and has registered “a number” of URLs in markets all over the world, chief operating officer Joseph Galli said Friday.

America Online slipped 1/2 to 54 9/16; Yahoo inched higher by 7/16 to 144 7/16.

Complex-Web hosting week

Globix (GBIX) added 1 to 33 and is set to close out the week with a 10 percent gain. On Thursday, Chase H&Q analyst David Levy initiated coverage on the complex Web-hosting company with a “buy” rating. Globix is transforming from a computer reseller to a complete Internet services provider, Levy pointed out.

This should narrow the gap between the company’s multiple and its peer group, such as Exodus, Digex (DIGX), Data Return, and Verio, said Levy. The group trades at an average of 11.2 times 2001 sales, while Globix trades at 7.1 times.

Meanwhile, shares of Exodus added 1/18 to 95 7/8, putting it on track to close out the week with a 9 percent gain. But Digex could be the week’s winner with Friday’s 2 1/8, or 3 percent rise, to 71 1/8, shares could close out the week up 27 percent.

Managing applications

Besides hosting and managing services, other companies are offering hosting and managed applications services.

After surging 27 percent Thursday, hybrid application hosting provider and I-consultant Breakaway Solutions (BWAY) managed to sprint out of the starting gate Friday. But by midday, shares hit a wall, slumping 2 1/2 to 39 1/4.

That’s not hard to swallow for anyone who bought shares at the start of the month when they traded at 24.

“We’re in front of an exceptional quarter,” said Randall Mehl, an analyst at Robert Baird & Company. “The company has the fastest internal growth of all the 32 e-services companies we track, and that’s largely due to its ASP business, which accounts for 15 percent of its sales.

“Its ASP business has incredible traction and it should significantly exceed our expectations,” he added. “The ASP business is something that has been valued highly by the market over the consulting side because of the higher level of recurring revenues, longer-term relationships, and perception that it’s more scalable.”

“Business is just plugging along really well,” said Bill Dering, an analyst at C.E. Unterberg, Towbin, who has a 12-month price target of 70 and a “strong buy” rating on Breakaway Solutions. “Early last month, we, along with other analysts raised this year’s sales estimates by about 50 percent, and in my experience, it’s rare to see anyone raise estimates that dramatically.”

But back in May, it was “like shouting in the wind,” Dering said. Moreover, the company has evolved to host the applications as opposed to just implementing them, he noted.

Breakaway prides itself in developing, implementation and hosting custom e-commerce applications for emerging enterprises.

But managed applications companies come in different shapes and forms. Another application service provider getting attention is USInternetworking, which provides an outsourced managed and hosting service of packaged enterprise systems. Shares are up 13/16, or 4 percent, to 21 1/2.

USInternetworking, one of the only pure-play ASPs, is selling at about 28 times its revenue run-rate, noted Robert Baird’s Mehl. Breakaway is selling at 26 times its revenue run-rate.

NaviSite (NAVI) is yet another ASP in the mix. Shares of Web and application hosting provider gave up 2 1/4 to 51 7/8, after slipping 13/16 on Thursday. Still, shares are up solidly for the month ahead of its quarterly results, which were release after the close Thursday.

The company reported third-quarter sales of $14.2 million, up 376 percent year-over-year, and up 55 percent from the previous quarter. Quarterly losses widened to $16.4 million or 29 cents a share, vs. $11.4 million in the year-ago period, and beating expectations.

Even more applications

Critical Path (CPTH), a provider of outsourced emails, saw shares run up 1 1/4 to 49. After an 80 percent nosedive from a high-water mark of 119 on March 19 left shares resting gingerly on top of the company’s IPO price of $24, investors began placing their bets. See Net sense.

Inktomi (INKT) jumped 4 7/16 to 130. On Thursday, the Foster, Calif.-based Internet infrastructure company unveiled its plans to buy Ultraseek from Disney’s Go.com (GO) for nearly $350 million in cash and stock. The move is expected to jumpstart Inktomi’s efforts to tap into the corporate intranet market.

Cash burn remains high

Ventro (VNTR) rose 1 3/16 to 28. The operator of vertical marketplaces continues to burn cash at about $30 million a quarter, noted CS First Boston B2B e-commerce analysts. This should increase to about $36 million in the fourth quarter. The multiple marketplace model makes sense but it’s very costly, making profitability unlikely before late 2003, according to the analysts.

Even so, CS First Boston, which was not part of the team of bankers that brought Ventro public in July of ’99 at 15, maintains its “buy” rating, and expects Ventro to meet consensus quarterly expectations. Ventro is expected to report net revenues of $1.7 million, with a cash loss per share of 79 cents when it releases second-quarter results in the third week of July.

Bambi Francisco is Internet editor of CBS.MarketWatch.com.