Digital Island Proves Patience Pays

Investors who hung tough with Web hosting firm Digital Island
through a summer of sluggish stock performance had their faith rewarded
in late October when shares of ISLD soared from the low $20s to close as
high as $73 per share on Nov. 3.

Hopefully they didn’t cash out during November’s backslide, when ISLD
receded to the low $40s, because Digital Island’s latest run-up makes
its previous surge seem downright terrestrial.

After closing Tuesday at 69 5/8, Digital Island (ISLD) shares jumped 71%
Wednesday to 114 15/16. The momentum continued into Thursday’s trading,
with ISLD hitting 144 5/8 in the morning before falling back to 135 by
noon, still nearly double Tuesday’s close.

Fueling this week’s ride is a deal with server vendor Sun Microsystems Inc. (SUNW)
and caching player Inktomi (INKT)
aimed at speeding the transmission of multimedia content over the
Internet. In addition to the partnership, Sun and Inktomi are investing
a total of $26 million in the San Francisco-based international Internet
services company.

Inktomi is becoming an important ally of Digital’s. The pair joined with
RealNetworks Inc. (RNWK) in early September to announce a global network for broadcasting video
and audio.

Digital Island’s ability to attract powerful partners stems from its
technology allowing large multinational corporations to efficient
conduct global e-commerce. The company offers customers an international
virtual private network (VPN) connected via data centers in the U.S.,
the Pacific and Europe and ISPs in 17 countries.

The latest agreement enables Digital Island to bolster its VPN by adding
as many as 3,800 new Sun servers to its current 1,200 servers. The
additional servers will feature Inktomi’s Traffic Server caching and
Content Delivery software.

For many global organizations choking on bandwidth constraints, the idea
of a parallel ‘Net connected the Internet at strategic points is
attractive, and Digital Island’s fiscal 1999 revenue of $12.4 million
was 431% above ’98’s $2.3 million.

But Digital Island has rough competition in the infrastructure market
with Exodus Communications (EXDS)
($68 million in revenues in the last quarter alone) and Akamai Technologies (AKAM),
which has little revenue (only $1.3 million so far this year) but boasts
new partnerships with Cisco Systems (CSCO)
and Microsoft (MSFT)
and a hefty $22.4 billion market cap.

Even at its current bulked-up size, Digital Island is valued at a mere
$4.6 billion, which means it now trades at a whopping 370x trailing 12
months’ revenue.

In September, I wrote that Digital Island “has consistently grown
revenue at least fivefold in each of the past three quarters (make that
four now), and seems poised to break out as a new star in the
infrastructure arena.”

Thanks to the revenue growth and key alliances, clearly that is
happening. But this is a stock that now has gotten ahead of itself.


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