Stock of the Day
Jun 29, 1999
Inktomi: Arms Merchant to the Web Wars
When Inktomi (Nasdaq:INKT - news) came public a year ago it was billed as an Internet search engine company,
prompting some investors to ask "Who needs another search engine?" A year later the answer is "Yahoo!, AOL,
@Home..." Inktomi has quickly come to be regarded as a top-tier Internet company by many investors. After the
recent shakeout in Net stocks, the higher-quality companies are the ones leading the way back and Inktomi appears
to be among them. The stock has rebounded over 30 points in the past two weeks, including 10 points on Monday.
Inktomi sells search software and other tools to web portals, e-commerce companies, and Internet service providers.
The company not only gets revenue from software licenses, but also per transaction and revenue sharing deals with
its customers. So while Inktomi lacks the brand recognition of a Yahoo! (Nasdaq:YHOO - news) or AOL
(NYSE:AOL - news) , two of its customers by the way, investors are realizing the merits of a "picks and shovels"
approach to the Internet gold rush. To apply another common analogy: as Yahoo! and AOL fight for eyeballs, and
as Amazon.com (Nasdaq:AMZN - news) and barnesandnoble.com (Nasdaq:BNBN - news) fight for customers, Inktomi is the arms merchant selling the
weapons in these web wars.
Inktomi's product lineup began with a search engine that it private labels for web portals like Yahoo! and destination sites like CNET (Nasdaq:CNET - news) .
Inktomi's product works behind the scenes so users usually don't know the search is powered by Inktomi's engine. Inktomi was able to sell this product to
established "search engine" sites because it offered superior performance, database depth and sophisticated premium options.
The company just launched a related product called Directory Engine. Directories use categories to organize web content, as opposed to search engines which
list sites based on keywords. Inktomi's product is the first electronic directory, meaning it uses software instead of people to organize sites into categories.
Inktomi also has a new Shopping Engine product which makes it easy for online shoppers to compare product features and prices, and then make the purchase.
The company has partnered with major merchants to include their products and will private label the Shopping Engine to web portals and destination sites.
Finally, Inktomi offers a Traffic Server caching system which it sells to Internet infrastructure companies. AOL, @Home (Nasdaq:ATHM - news) and Exodus
Communications (Nasdaq:EXDS - news) are a few of the well-known names on its customer list. This product caches content closer to the end user, improving
response speeds and freeing up valuable bandwidth for the network operators. Demand for Inktomi's caching solution is already high and should grow
substantially as bandwidth-intensive multimedia (audio and video) become integral to the Internet experience.
Inktomi still bears the scarlet letter of Internet stocks--i.e., it's spending more money than it makes--but unlike so many of the others including kingpins like
Amazon.com, there is an end in sight for Inktomi. Its traditional business model of licensing software to the Internet infrastructure companies makes it easy to
believe analyst forecasts of a profit by the end of next year. Furthermore, the company gets annuity revenues (per transaction and revenue sharing) from the
portals using Inktomi's search and shopping engines, providing recurring revenues and allowing for significant upside potential correlated to the growth of the
Internet.
For years, investors in Internet stocks tended toward consumer brand names they recognized and used every day online. Now, more and more are finding it
worthwhile to dig behind the scenes and see who's really powering the Net experience. Inktomi's position as the "arms merchant to the web wars" makes it an
intriguing company to watch.
- James Hale
The Online Investor |
