The following is an excerpt from DB Alex Brown's opinion on Digex dated: 10/6/00
Investment Thesis
Our overall sector thesis remains that Web hosting providers are core
infrastructure plays in the Internet and should be overweighted by investors
looking for companies that benefit from the overall growth of the Internet.
We expect the overall Web-hosting sector to achieve $19 billion in revenue
per annum by 2003. As more companies move to e-commerce and
applications outsourcing, high-speed access and Web-hosting services are
becoming essential elements of computing and communications. Unlike the
various content plays, we believe investors in these companies merely have
to count on the overall growth of the Internet versus just one specific e-commerce
or advertising-driven business model. Investors should, in our
view, enjoy both the growth of the content plays and the recurring revenues
and high operating leverage of communications services providers. Shared
Web hosting is an attractive segment in the Web-hosting sector, in our view.
It is expected to grow to $5 billion in 2003 from $256 million in 1998 (source:
International Data Corporation). Even more attractive, in our opinion, the
dedicated hosting market is estimated to grow to $14 billion in 2003, and
should continue to be the most attractive segment within the Web-hosting
market. Both segments are large and fast growing and both enjoy attractive
margins. Unlike other communications sectors (e.g., long distance), hosting
companies have been able to increase prices without any measurable
increase in churn or significant change in its contract win rate.
In 2000, the Web-hosting sector has exhibited strong fundamentals,
particularly related to sustained pricing and customer growth. While the
majority of communication services sectors have been experiencing rapid
declines in pricing, we note that both the Web hosting and application
services providers (ASPs) have been able to raise prices during the past two
years. We expect this trend to continue in both sectors, particularly with the
advent of value-added services in both groups. We continue to be impressed
with the ability of Exodus Communications to produce strong sequential
revenue and gross margin growth. Digex has exhibited strong growth in
managed Web-hosting servers and both companies exhibited strong
customer growth and annualized revenue per customer. We see very little in
the way of impediments for the sector, other than unreasonable sequential
revenue growth expectations on the part of the Street, in some instances.
Web hosting, in our opinion, is a critical enabler of e-commerce, and we
believe that investors will benefit from both the growth of content plays with
the recurring revenues and high operating leverage of communications
services providers. |
