Shares in Inktomi Inc plunged almost 15% on Friday after influential Merrill Lynch & Co analyst, Henry Blodget, cut his rating on the internet infrastructure software firm and predicted wider losses, prompting investors to jettison their holdings in droves. The Foster City, California-based firm lost as much as $1bn of its market valuation as its share price dropped as low as $101 before rallying to end the day at $103.06 – 14.47% down on Thursday’s closing price.
Inktomi reported slightly smaller-than-expected fourth-quarter losses on Thursday, with revenue up 217% on the same period last year. The firm offered no projections for future earnings in the announcement, which covered results for the three months to September 30. But it did announce plans to develop its Traffic Server network caching software for large companies, seeking to diversify its customer base beyond the internet service providers and telecommunications carriers it has hitherto targeted. Inktomi also talked about ongoing efforts to build sales of its online shopping search engine.
Blodget expressed concern in a report published after the result announcement that Inktomi appears to be having to invest more in sales and marketing and product development than Merrill expected to maintain its leadership position and growth rate. During the quarter sales and marketing costs spiraled more than 124% to $18.65m and research and development costs increased more than 73% to $8.25m. Blodget doubled his loss estimate for the current fiscal year to $24m.
He also suggested that shares in the firm are overpriced. As of Thursday’s closing price Inktomi was valued in the market at $6.2bn, after more than doubling its share price over the past year. The firm posted a fourth-quarter net loss of $4.9m, or 9 cents a share, to beat the consensus of analysts’ expectations by a one cent a share. When the company begins to merely meet or reduce future estimates (top or bottom line), [market] valuation usually comes back into play, said Blodget, who cut his rating on the shares from accumulate to neutral.
Inktomi’s loss for the quarter represented a more than 40% reduction on the year-ago loss of $8.5m,, which was equivalent to 18 cents a share. Revenue more than tripled to $26.2m from $8.3m. Blodget himself had expected the firm to show sales of only $22m. He concurred with the 10 cents a share consensus of analysts’ earnings expectations.
Blodget’s word holds a lot of sway among investors and he is considered one of the most sage internet stock analysts. Last December he tipped Amazon.com Inc to reach a share price of $400 within 12 months – a target it reached by January. Every analyst at the 15 investment banks that follow Inktomi raised their loss estimates for the current year on the strength of Thursday’s results announcement but Blodget was the only one to cut his rating on the stock.
Inktomi chairman and chief executive officer, David Peterschmidt attributed higher costs to the firm’s acquisition of WebSpective Software Inc for $106m,which swelled headcount by more than 40. It’s not a change in the growth rate of Inktomis’s revenue growth, said Peterschmidt in a statement designed to quell market concern. He said the addition of the new people had not been factored into the earnings models used by analysts.
