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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Apollo who wrote (12457)	12/8/1999 11:50:00 PM
From: pala	Respond to of 54805

Great job on Exodus Apollo! Doug EOM

To: Apollo who wrote (12457)	12/9/1999 1:41:00 AM
From: Sam Johnson	Read Replies (1) \| Respond to of 54805

Apollo, great report on Exodus. I've been vaguely interested in them for awhile but never looked too closely. Now I'm much more interested. Thanks for: 1) Demonstrating that GG metrics can be applied to an internet co. Nice point about a king in a tornado - great short-to-medium term prospects, but watch them closely and hold them lightly. 2) Giving a great template for anyone else thinking of doing GG analysis to present to the list. You've raised the bar for the rest of us. 3) Making me salivate over this stat: "Management estimates that Exodus currently handles one-fourth of all Internet traffic." Wow...I'm still trying to get my mind around that line. Sam

To: Apollo who wrote (12457)	12/9/1999 2:20:00 PM
From: John Stichnoth	Read Replies (3) \| Respond to of 54805

Apollo, Terrific job on Exodus. Of course, we're supposed to pick apart some of what you said, right? :o) My problem with them, like so many pure internet plays, is the looming competition from more mature players. Haven't both Intel and IBM announced and begun moving into this space? So, we have two gorillas trying to move against a king, I think. (IBM's gorillahood is very long in the tooth, of course, but they're still a gorilla aren't they?). In any case, they've got a lot of resources to bring to bear on the sector. A quick comparison follows. Oh, and I am for now ignoring the various lesser sorts named as competition. ................EXDS.........IBM..........INTC ................----.........----.........---- Price...........$155.........$117.25......$73 Mkt Cap.........$13.2Bn......$211.5Bn.....$244Bn Pr/Sales........83.9x........ 2.5x........ 9x EPS.............-1.14........ 4.22........ 2.09 Book ps......... 0.24........ 10.47....... 7.05 Cash ps......... 1.88........ 3.15....... 2.21 Zacks Est's 2000 EPS........ -.67........ 4.29....... 2.66 2004 EPS........??(+58% pa).. 8.90....... 5.52 (I've never quite figured out how Zacks arrives at a compounded earnings growth when a company is losing money in the beginning). I'm not sure that the quick comparison "answers" anything, of course. It points out how much lower EXDS's market cap is than the others'. Does that mean it's undervalued? It may, if in 5 years or 10 years each of these companies is deriving the bulk of earnings growth from IDC-related activities. otoh, Both INTC and especially IBM have such extensive relationships with the largest old-line companies, that they might be viewed as having a headstart in future growth. Which brings up another question--Do the earlybirds to the net have a permanent lead? Now as more and more of the mainstream companies begin e-commerce activities are they going to begin to steal share from the earlier players? I think today or yesterday the WSJ had an article on Schwab's prospects. The current consensus seems to be that Schwab's market share will decline as all of the established brokers do what Merrill and MSDW have already done, moving to copy Schwab's model. If the latter occurs in books, b2b, clothes, yadda-yadda, doesn't that give IBM the inside track with a lot of these companies? btw, I'd bet that IBM would dispute the statistics about 27% of traffic, or one-fourth of traffic is now EXDS's. But, I have no evidence to dispute it. All of the above offered as fuel for thought. Best, JS PS--Does anyone know how to change fonts in SI posts? Normal html coding doesn't seem to work.

To: Apollo who wrote (12457)	12/12/1999 10:29:00 PM
From: Mike Buckley	Read Replies (1) \| Respond to of 54805

Stan, I've finally digested your great write-up of Exodus. Sorry it took so long. Not that I need to tell you, but you did a terrific job of putting everything in the context of the criteria we investigate here on a daily basis. I hope you don't mind if I add some context that is not the stuff we normally discuss here. But before we get to the stuff we don't usually discuss, I've just gotta mention that the growth really is amazing. I noticed that nearly one-fourth of the customers were added in the last quarter. Incredible. Not to be too nit picky, but be careful about rounding up even when you're using very round numbers. If you're creating a model of revenues, earnings, and cash flow before making an investment, rounding up can be dangerous because doing so adds a degree of risk to your assumptions. As an example: Annual revenue for 1999, 2000, 2001 should be $300 million, $600 million, and > $1billion. To achieve $300 million this year, the company will have to do $160 million in the fourth quarter. That's more than the three previous quarters combined. That's nearly 140% sequential growth, more than twice the sequential growth of any particular quarter of the previous four quarters. It's possible, I guess, but not likely unless you know some other specifics that support the probability. Tremendous run of earnings surprises According to Zack's, there were only two earnings surprises in the five most recent quarters. All of them were in the range of only 2%. No big surprises there in my mind. You mentioned the $1 billion in convertible and senior debt. Not including the convertible debt, the company's $500 million in long-term debt is about 25% of equity. The huge amount of debt is no doubt necessitated by the high cost of each IDC and management's decision to get a lead on the market by building them out ahead of all competitors' schedules. Though the reason for the debt is easily explained, it raises some important questions the prudent investor really should answer before plunking down hard-earned savings. How many IDCs at $40 million a pop will be built and in what period of time? Will the current cash combined with future operating cash flow fund the build-out of those IDCs along with the other costs of growth? If not, will more debt and/or more shares have to be issued? To what extent? How soon? I found one inexplicable issue that couldn't be addressed in the short time I looked at it. At WSRN, the total dollar losses are growing widely yet the EPS losses are growing smaller. The usual explanation of that is an increasing number of outstanding shares. At a glance, that didn't seem to be the case. Be sure to look at it and decide for yourself what explains the incongruity between total losses and EPS losses. Analysts value Exodus Communications at about a P/S ratio = 20-25. At the time you wrote that the market cap was about $14 billion. That reflects a PSR of about 100. If the market cap doesn't change and if the company achieves $250 million in 1999 revenue (achievable based on the track record but not a slam dunk), the PSR will lower to 55. My point is that with such dramatic growth in revenue, the PSR is likely to change a lot even if the market cap increases. So rather than focusing on the currently volatile situation, it might not be a bad idea to compare the analysts' expected PSR with other investing alternatives. As one example, Cisco's PSR right now is 25. There's no question that Cisco's growth is a lot slower than Exodus's growth. Nonetheless, given the options of investing in Cisco or Exodus, an investor must answer a key question: Recognizing that analysts eventually expect Exodus's PSR to contract to 20 - 25, which is better -- the current PSR of Exodus the King approaching 90 or the current PSR of 25 for Cisco the Gorilla? That in turn leads to our earlier discussion about the likelihood of Exodus being or becoming a Godzilla? Your write-up is so good that it helped clarify my thoughts about that. It seems to me that there are two avenues that might lead to the Godzilla aptitude. The first is if it is beneficial for Exodus's customers to bring their customers and suppliers to Exodus. The second is if the partnering ASPs bring customers to Exodus. Both forms of revenue would be the result of the network effects that creates a Godzilla. Hope this helps. --Mike Buckley P. S. One thing I forgot to clarify. When Lindy mentioned that Zack's shows the company showing a loss next year though you mention that the company expects to be profitable for the first time next year, the two are not mutually exclusive. It's possible that the company has its first profitable quarter next year (making your point valid) while sustaining a loss for the entire year (making Lindy's point valid.)