Market Misses Big Picture With Inktomi

Investors in Inktomi should indeed be bothered by news that Yahoo! is replacing the
company’s search technology with that of rival Google.

After all, Yahoo’s search service is used more than any other by Web surfers
worldwide, and thus provides a high-profile platform for whatever search
technology runs behind the user interface.

But does that customer loss do $3 billion in damage to Inktomi? Of course
not. Yet panicky investors rushed to dump INKT shares Monday, driving the
stock down to 113, or 19.5 percent below Friday’s closing price of 140 3/8.
In terms of market capitalization, that’s a drop from $15.5 billion to $12.5
billion.

And while shares had crawled back up to 117 by late morning, the selloff
still wiped out most of INKT’s gains for the month of June.

However, even after the market’s overreaction, Inktomi remains one of the
top-performing Internet stocks of the year to date. Through Friday’s
closing, shares of INKT were up 58 percent, a YTD gain exceeded by only
eight other ‘Net stocks.

At $117 per share, INKT is up 31.2 percent YTD a gain that puts it among
the 15 biggest YTD gainers.

In light of the “buy the rumor, sell the news” investment adage, the
market’s overreaction isn’t shocking. Nor is it unwelcome, at least for
investors who recognize an opportunity to buy into a major ‘Net player at a
temporary discount, and who understand where Inktomi is headed.

Sure, the company initially made a name for itself with its HotBot search
technology, but Inktomi for some time has been focusing more on its caching
server technology as large networks and ISPs have struggled to handle the
volume of traffic bombarding them. A look at Inktomi’s revenue growth
underscores this strategy.

Sales of the Traffic Server caching software and other networking products
were $52.9 million in the six months ended March 31, an increase of $38.6
million, or 268 percent, over the comparable year-ago period. In contrast,
search technology revenue for that same recent six-month period was $30.5
million, an increase of $18.8 million, or 161 percent over the year-ago
period.

Further, Inktomi is moving aggressively to position itself as a key
infrastructure player in the wireless sector.

Bottom line: This is a company that has held, and even increased its value,
in an imploding market, and has been successfully repositioning itself to
lessen its dependence on search technology revenues. Losing Yahoo as a
general search customer does little or no harm to Inktomi in the long run.

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