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Exodus’s Stock Seen Going Higher


by Hal Plotkin
Silicon Valley Correspondent

One of the hidden powers behind the Web is getting even higher marks from Wall Street analysts who expect the company’s stock to exceed expectations.

Several analysts recently raised their price targets for San Jose, Calif.-based Exodus Communications Inc.’s {EXDS}, citing expectations the company will report strong revenue growth later this month.

“Exodus has a dominant market position in what we believe is the engine of the Internet, Web hosting,” says James Linnehan, vice president at Thomas Weisel Partners, based in New York.

Web-hosting firms build, maintain and analyze Internet sites for their customers. Exodus’s clients include eBay, Intktomi, Lycos and Microsoft, and its hosts more than 40 percent of the top Web sites on the Internet, according to Media Metrix.

Last month, Linnehan raised his 12-month price target to $170 for the stock, up from the target of $65 he set last September, adjusted for the company’s recent two-for-one stock split.

And Linnehan’s not alone.

Within the past several weeks, at least four of the analysts who follow Exodus Communications all set ambitious new price targets for the stock which has, for the most part, been moving up steadily over the past two years. Exodus shares fell back slightly, to $90, during trading on Tuesday


Exodus Communications two-year stock performance

Last week, Dain Rauscher Wessels analysts Stephen Sigmond and Cynthia Houlton raised their 12-month price target for Exodus’ stock to $115. Their previous target, set several months earlier, was $75.

“Exodus is scheduled to report 4Q99 financial and operating results after the market close on Jan. 26,” the Dain Rauscher Wessels analysts wrote in a research note supporting their new price target. “We remain confident that Exodus is tracking ahead of our estimates in all areas.”

Analyst Opinions on EXDS
Strong Buy 15
Buy 8
Hold 0
Sell 0
Strong Sell 0

Full Analyst Report
Source: Zacks

The Dain Rauscher Wessels analysts expect Exodus to post fourth-quarter 1999 revenue in excess of the $85.2 million they had previously forecast.

On Dec. 15, Soundview Technology Group, based in New York, also initiated coverage of Exodus Communications with a “buy” recommendation and a 12-month price target of $197.

That was followed one week later by PaineWebber senior analyst John Hodulik, who upped his 12-month price target to $105 from $78.

“The trends everyone is excited about today, such as B2B commerce, require improvements in Web-site infrastructure,” Hodulik says. “The more we hear from those other groups, the stronger Exodus sounds.”

“There are a lot of trends on the Internet these days that are working in Exodus’ favor,” Hodulik says. “The increasing complexity of Web sites and the trend toward outsourcing, for example, put Exodus in a great spot.”

Although Hodulik’s new price target, $105, is at the low end of the range set by other analysts, he says he doesn’t think the higher targets are out of reach.

“They don’t seem unreasonable to me,” Hodulik says. “Exodus inspires a lot of confidence in investors.”

Kathey Hale, a principal analyst at Dataquest, based in San Jose, Calif., shares that confidence, up to a point.

Hale notes that the overall Web-hosting market is expected to explode from $1.6 billion this year to more than $5.8 billion by 2003, according to estimates put together by her firm. “Exodus is doing really well in that market,” she says. “They’ve had a really high growth rate this year and are very much in an expansion mode.”

One thing that does concern Hale, though, are indications of increasing competition from some unexpected quarters.

Akamai Technologies Inc. {AKAM}, for example, a leading controlled content delivery or “caching” company, houses its servers in many Exodus facilities and is beginning to offer a new line of services that competes more directly with Exodus. “They might be a Trojan horse,” Hale says. “Exodus is going to have to worry about people coming in as customers and turning into competitors.”


Akamai Technologies post-IPO stock performance

Hale says there is now a building race going on to see which companies can build the largest number of data centers around the world. Exodus has been leading in that, she says.

“They’ve been rewarded with revenue growth that has been really phenomenal, which is good since they will need that money to finance the next round of growth,” she adds.

Joel Yaffe, an analyst at the Giga Information Group, based in Boston, says he understands the optimism financial analysts are voicing about Exodus’ prospects. “There’s definitely truth to it,” he says. “Exodus is the largest independent Web-hosting firm out there. They are very well positioned, both in terms of the market and in mind-share.”

Yaffe notes that Exodus faces a raft of competitors who are coming at it from different market segments. There are large, deep-pocket phone companies, such as AT&T Corp. {T} and MCI WorldCom Inc. {WCOM}, information-technology vendors, such as Electronic Data Systems Inc. {EDS} and International Business Machines Corp. {IBM}, and Internet service companies such as Digex Inc. {DIGX}, Digital Island Inc. {ISLD} and Verio.

On the other hand, Yaffe says that Exodus’ early success attracting major customers puts the company in a very strong position moving forward. “If a company decides to replace one Web-hosting company with another it takes time, money, and is a real pain in the neck,” he says. “Exodus has done a very good job of establishing itself as the preeminent web-hosting firm.”

Nonetheless, Yaffe says it remains hard for him to justify the high valuation placed not only on Exodus but on many other firms in the Internet infrastructure sector.

“I don’t understand why many of the firms are valued as they are,” Yaffe says. “It’s a joke. You’ve got to wonder what these guys can pull out of their hat to justify those numbers. In the end, the companies that are really going to benefit from all this are the carriers, the telephone companies. But no one seems to be looking at that. Right now, there’s just a lot of speculation going on.”

Linnehan disagrees. “This is a company that has grown 40 percent top line for the last 14 quarters,” he says. “Their customers are increasing Web traffic by 80 percent over last year. You can expect a very solid quarter from Exodus.”

On Oct. 21, Exodus reported third-quarter red ink of $24.7 million on revenue of $67.6 million, compared with a loss of $17.7 million on revenue of $14.4 million for the same period a year earlier. The company has recently made several strategic acquisitions that are designed to bolster its geographical reach and augment its service offerings.

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