August 11, 2000

InterNap could thrive on Internet scalability

Each week, the Daily Journal of Commerce asks local analysts their views on Northwest stocks.

Stock prices reflect Thursday's closing. The Dow closed up 2.93 points at 10,908.76, and the Nasdaq fell 93.51 points to 3,759.99. The S&P 500 lost 12.62 to close at 1,460.25.

Analysts use the following guidelines for their recommendations:

• Strong buy, buy or highest
  
• Buy/accumulate, mild buy, outperform, attractive or above average
  
• Neutral, hold, reasonably priced, average or market performer
  
• Mild sell, unattractive, below average or underperform
  
• Sell, lowest

52-week high: $111
52-week low: $19 1/2

Strong buy. Dain Rauscher this week initiated coverage of InterNap with a 'strong buy-aggressive' rating, setting a $53 six-month price target.

The Seattle-based InterNap is a leading provider of managed high performance Internet connectivity services using patented technology. InterNap customers include businesses seeking to maximize the performance of "mission-critical" Internet-based applications.

"As computing moves from a PC and enterprise model to a utility or service provider model, we believe there is tremendous need for high performance, carrier-class computing infrastructure," said Cynthia Houlton of Dain Rauscher. "InterNap's core services target the rapidly growing demand for Internet bandwidth which is estimated in North America to grow to 4,500 gigabits per second in 2004, from 300 gigabits per second in 1999."

She cites InterNap's advantages in scalability, high performance connectivity, redundant network architecture and reliable customer service. Annual estimates for revenues are $68 million in 2000 and $204 million in 2001, a 202 percent increase over 2000.

"We believe InterNap is very attractively positioned in the rapidly growing application infrastructure services industry -- based on InterNap's large and rapidly growing market opportunity, strong management team, strong cash position and current valuation," said Houlton.

52-week high: $161
52-week low: $34 5/8

Outperform. VoiceStream reported results this week that fell short of expectations at Salomon Smith Barney, according to analyst Michael Rollins. The company reported a net loss, including preferred stock dividends, of $419.7 million, or $2.16 a share, compared with a loss of $132.8 million, or $1.39 a share in the same period a year ago.

"VoiceStream reported mixed second quarter results as the top-line was short of our forecasts, while the company generated significantly greater operational scale during the quarter associated with the restructuring," said Rollins. "On a positive note, cash flow performance was significantly better than we had forecasted."

However, Salomon Smith Barney is lowering its second half 2000 net add forecast to 1.12 million subscribers from 1.24 million.

"Overall, management remains bullish on its ability to complete the [Deutsche Telekom] merger within nine months and cited the FCC approval process as one of the four approval processes that is likely to take the longest to complete," he said, referring to a conference call with management this week. "We assign a 70 percent probability that the deal successfully closes in 12 months. We maintain 'outperform' recommendation as VoiceStream is trading at a 31 percent discount to the merger terms and even further below our fundamental value of $175 a share."

52-week high: $33 1/8
52-week low: $2 7/16

Buy. N2H2 recently reported third quarter revenues of $3.3 million -- 11 percent ahead of analysts' estimates, representing 14 percent sequential revenue growth. N2H2 is a provider of server-based Internet content filtering solutions and filtered search capabilities, for businesses hoping to maximize Internet-based applications.

"Revenue strength came as a result of better-than-anticipated installation revenues as the company continued to gain traction in both enterprise and education markets," said U.S. Bancorp/Piper Jaffray analyst Safa Rashtchy.

The company recently introduced its new ISP filtering product, N2H2 For Home -- ISP Edition -- which offers a proprietary technology and maintains N2H2's strong filtering system, Rashtchy said. The company has applied for a patent on the product. He said this product could be a potential source of significant revenue in the second half of next year, eventually growing to comprise as much as 20 percent to 40 percent of revenue.

"We believe that N2H2 has clearly shown a strong momentum in capturing the dominant market share in schools," he said. "Most promising is the new home filtering product, which could add significant stability and stability and visibility to N2H2's model." He remains cautious, but maintains a 'buy' rating.

52-week high: $69 1/8
52-week low: $17 7/16

Buy. Dain Rauscher's Bob Toomey recently downgraded Electro Scientific Industries from a "strong buy" to a "buy" after the company suffered a setback last week with a patent application before the U.S. Patent and Trademark Office.

The Patent Office announced that ESI's laser processing system has claims that are unpatentable. But ESI has the opportunity to respond to the Patent Office and assert the patentability of the claims.

Nevertheless, Toomey said the stock must "achieve stability" before he becomes more aggressive. "Pressure on ESIO stock is symptomatic of the entire group and reflects investor concerns over a slowing in near-term growth for the semiconductor capital equipment sector," he said. "While we believe the current cycle is far from over, we expect there could be further downward pressure on price-to-earnings ratios and ESIO stock."

The stock retreated 20 percent Aug. 3 -- the day after the Patent Office announcement -- breaking an important technical support level, Toomey said. He also cites recent warnings by telecom stalwarts Lucent and Nokia over earnings expectations, concerns of a slowing economy and a slowdown in the PC market as additional downward pressuring factors.

"We expect a troughing of a moderate and mid-cycle downturn in ESI's earnings late in fiscal 2001 and early fiscal 2002," he said. "We would emphasize that ESI continues to have excellent long-term growth prospects for its capacity production and memory repair business as well as its advanced laser via drilling technology which remains unsurpassed in the high-end segment." His revised 12-month price target is $45.

52-week high: $64 3/8
52-week low: $17

Strong buy. Recent second quarter results showed Getty's revenue increased 18 percent sequentially to $123.6 million from $116 million. Increasing scale and realized integration synergies drove operating expenses as a percent of revenue to 61.8 percent from 67.4 percent in Q1, according to Pacific Crest analyst Steve Weinstein.

Getty is a leading provider of imagery to businesses and consumers worldwide -- distributing products digitally over the Internet and on CD-Rom.

"Getty is pilot testing a digital asset management solution and entering what could be a $2 billion industry by 2003," said Weinstein. "Significant investment in the consumer channel signals a ramp in opportunities outside the art.com e-commerce site."

He said Getty remains a value play, and sets a 12-month price target of $60.

52-week high: $40 5/16
52-week low: $9 1/2

Strong buy. Metawave, which provides "smart" antenna systems to wireless network operators, recently expanded the breadth of its product portfolio. The company announced trial deployments of its GSM 900 MHz and CDMA 1900 MHz Spotlight antenna systems.

"This represents a major milestone for the company, since prior to the announcement all of Metawave's revenues were generated from the sale of its CDMA 800 MHz systems," said Dain Rauscher analyst Samuel May. "We believe the operator trials are only the first of more to come and subsequently we anticipate that Metawave will begin generating measurable incremental revenues from these new systems in the first quarter of 2001. Between the two new air interfaces offered, Metawave virtually increases its addressable market by a factor of three times, which constitutes a substantial opportunity for the company going forward." He sets a 12-month price target of $45.

Previous columns:

• Cell Therapeutics excels with cancer drug, 08-04-2000
• InfoSpace more attractive with Go2Net acquisition, 07-28-2000
• Lattice Semi leads with logic devices, 07-21-2000
• Northwest Stock Report, 07-14-2000
• Expeditors finds growth in global logistics, 07-07-2000
• Online travel site rated a buy buy, 06-30-2000
• Primus leads in its e-business field, 06-23-2000
• Tektronix moves into high growth markets, 06-16-2000