Analysts Like Exodus' Odds Against Intel
By Spencer E. Ante
Staff Reporter
6/3/99 1:00 PM ET
SAN FRANCISCO -- When Intel (INTC:Nasdaq) enters a new market, investors in companies already there often head for the gates. But in the case of the chip giant taking on Exodus (EXDS:Nasdaq), analysts say investors may be jumping the gun if they back out of the Internet company.
Since Intel said on April 23 that it would pour more than $1 billion into a network of data centers over the next few years, investors have shied away from Exodus, an Internet start-up that has staked a leading position in the Web-hosting market. Exodus has dropped 24% since that announcement, while the S&P 500 has slid 4% and the TheStreet.com Internet Sector index is off 15%.
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"To be a prudent investor, you've got be worried," says Matt Ankrum, an analyst with Janus Capital. Janus, which manages more than $108 billion, is a top institutional holder of Exodus.
Even Exodus CEO Ellen Hancock frets about Intel. "You always have to be worried when someone comes in the space, especially someone with the skills and experience of Intel," she says.
But despite the general unease about Intel's move, many analysts and money managers say they're not overly concerned about the chip giant's plans. For now, at least, Intel and Exodus seem to be vying for a different set of customers.
"Intel is pretty far from competing in the niche that Exodus has carved out for itself," says Kristen Koh, an analyst with Credit Suisse First Boston, which does not cover Exodus currently. "They're at very different ends of the business." CSFB isn't an underwriter of Exodus, but Koh says her firm's venture-capital arm did invest in the company before it went public.
The niche that Exodus has targeted is the lucrative high end of the Web-hosting market. These are primarily the blue-chip variety of dot-com companies like Yahoo! (YHOO:Nasdaq), Hotmail and Lycos (LCOS:Nasdaq). Exodus also works with more traditional enterprises that are moving their business onto the Internet, such as Hewlett-Packard (HWP:NYSE) and DuPont (DD:NYSE). Exodus employs a co-location strategy in which customers buy their own servers and then rent space from an Exodus data center.
Intel, targeting companies less experienced with the Internet, hopes to sell them Intel-based hardware and the real estate to host those computers. Intel will oblige customers who insist on equipment from rivals like Sun Microsystems (SUNW:Nasdaq), which run on the Unix operating system.
"Intel has no experience with Unix boxes," says Chris Bonavico, portfolio manager for Transamerica Investment Services, whose funds hold Exodus shares. "The Intel processor with [a Windows] NT server is not going to serve the needs of the high-end Unix-based market."
Intel's bias toward its own products underscores a key problem facing the company as it enters the Web-hosting market: its lack of experience in any business besides computer chip manufacturing. "It's pretty far away from their core competence," says Emeric McDonald, an analyst with Amerindo Investment Advisors, speaking of the Web-hosting business. "They should buy Exodus."
While Intel will have to quickly develop expertise in computer networking and Internet services, Exodus excels at providing customer service and Internet connectivity. Apart from hosting a company's computers, these are the two areas that generate revenue for Exodus. Managed services such as caching and network security will account for more than 20% of the company's business by year-end, say company executives. And CEO Hancock says that 60% of Exodus's 1,000 employees are working in a customer-service function.
"All of their customers are very pleased with the quality of service," says Bonavico, who says he talks to the company's customers regularly. "That's why they're taking business away from the telephone companies."
Even if Intel finds a way to succeed, analysts say the Web-hosting market's size and rapid growth are enough to support a number of players. Which is another way of saying that Exodus' destiny is in its own hands.
"Their biggest issue is continued execution," says Bonavico. "They need to continue to serve customers well and deepen the relationship with more managed services."
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