After studying the situation a bit I was wondering how others here have tried to place a valuation on this company.
Given that DI will expand the number of servers by about 600 percent over the next 3 years (using new, higher capacity servers and other equipment) I estimate (rough at best) that annual 2002 revenues may be in the neighborhood of $1.5-2.0B. Revenue growth rates in years beyond 2002 should remain high, although probably not as high as current growth (400%). I expect that 100% growth may be sustainable through the next decade, i.e, once a revenue base of about $1B per annum has been reached. This gets DI to the range of $8-10B annual revenues by about 2005. Note that this is roughly 1000x estimated revenue for the current year. To achieve this increase, network capacity and traffic will have to expand much more than this, probably by at least 10000x (to reflect declining costs in a competitive environment). Can they do it? Anyone that tells you they can precisely predict the revenue path for this business is spinning a 'yarn' as we say. Nonetheless, as long as most of the revenue can be channeled back into network development then the company is growing a "cash cow" that can continue to expand until the market is saturated (very long time from now). As an early leader in inter-networking DI may capture a significant portion of the total market. On the other hand their network will need to be maintained and rapidly upgraded (replaced) to ensure that they remain competitive. Partnering with SUN gives DI crucial access to the best technology and long-term hardware deployment strategies. In five years DI's network will likely carry at least 10000x the present traffic, and even this estimate could be absurdly low if, for example, streaming video impacts in a big way. Despite allowing for declining costs per byte of data stored and transmitted the network should generate huge cash flow.
Clearly this network will be of enormous value to DI's customers. The basic internet business model is that the value of the network expands exponentially with increasing number of nodes. But what about the value to shareholders? DI's challenge is to enable their customers to maximize expanding network benefits, while DI itself remains viable in an operating cash flow sense. As long as this viability is demonstrated, the future is wide open. If the company is perceived to make any missteps then the entire model may be called into question. Vulnerability is greatest at the early stages of network growth, which we will soon (if not already) have surpassed.
The bottom line is that the company could reach EBITDA on the order of $10B in 5 years. Growth at that time should still be very strong and if one conservatively assigns an EBITDA multiple of 3x we should see a stock price of about $500-600. I feel that this is a relatively conservative estimate that does not take into account potentially strong synergies with AOL/Time Warner, streaming media, and future alliances similar to the recent merger with Sandpiper Networks.
Comments would be appreciated. Also if there is a rational explanation for the discrepancy in valuations currently afforded to DI and AKAM I would be interested to hear it. |
