2010 Top Stock Winners Revealed In The IT Services Sector By Senior Analyst With D.A. Davidson
February 17, 2010 - The Wall Street Transcript has just published Internet Services Report offering a timely review of the IT Services sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Donna Jaegers joined D.A. Davidson, where she is a Senior Analyst covering telecom services, in September 2008. She previously worked for Janco Partners, where she was the Director of Research for the Telecom and Media Research Boutique. Ms. Jaegers has been an Analyst both on the buy side and sell side since the early 1980s. She worked at PaineWebber and Janco Partners on the sell side, and at Bank of America Capital Management, Mississippi Valley Advisors and Invesco Funds Group on the buy side. She has a master's degree in economics from the University of Missouri.
TWST: Is there one trend you would point to as the one that may have the biggest impact in 2010?
Ms. Jaegers: I think over-the-top video viewing is going to continue to be a very, very strong trend. It was starting to pick up in the last few years, and you're seeing companies like hulu.com put a lot of television programming on the Internet. What I've found over the years is that once technology allows a service to happen, it's very hard for the entrenched competitors, like the media companies in this example, to suddenly slam the brakes on over-the-top viewing and to control its growth. At CES there were a lot of Internet-ready televisions on display. Right now you have a lot of consumers that are hard-hit by the economy, trying to save money and looking at ways that they can see the television shows that they want over the Internet instead of having to pay a cable bill or a satellite provider. I think that trend will continue to happen.
TWST: How do the companies in this space differentiate themselves in this crowded marketplace?
Ms. Jaegers: Whenever there is not any sort of strict barrier to entry, there is always a lot of competition. In the content distribution networking (CDN) space, for example, there used to be a huge barrier to entry because of the patent portfolio that Akamai controlled. But now with Limelight winning their patent suit against Akamai, that barrier seems to be lessening. And you've had a lot of telecom carriers and venture capital-funded startups really try to approach the industry in order to get a foothold in the industry.
I guess the one remaining barrier to entry in the CDN space is scale. Since some of the carriers like AT&T (T) are having problems actually getting scale in the industry, it suggests that scaling of the software is much more difficult than one would imagine. What I try to do to gauge the competitiveness of the market is actually talk to salespeople that sell for different companies to try to understand how aggressive the bidding is on different contracts, and then look also at any sort of industry data on pricing that's available. In the CDN space, pricing fell 30% to 35% on average last year.
TWST: You have a buy rating on Savvis. Tell us that what you like about this company and why right now is a good time to buy the stock.
Ms. Jaegers: I think Savvis for the last few years was like the gang that couldn't shoot straight - at least that was Wall Street's perception - because they came out with very aggressive guidance originally in late 2007 for their 2008 year and then had to backpedal throughout 2008 as the economy contracted, and as they didn't execute as well as they had anticipated. So going forward, I think the opportunity in Savvis is that the stock is valued at a much lower multiple than its peers'.
Savvis, as of end of the year, was trading at 5.1 times its enterprise value-to-EBITDA compared to Equinix (EQIX) at 10.4 times - so a huge discount to its closest peer. I think 2010 will be an opportunity for Savvis to really accelerate their sales momentum. They are bringing on a new data center in Weehawken, N.J., right outside the Lincoln Tunnel. They have pent-up demand for that data center and it should accelerate their sales growth, especially when it comes to proximity hosting and any sort of low latency trading.
TWST: Which companies are doing the best job of capturing international markets? How important are international markets to companies in this space?
Ms. Jaegers: For the CDN companies, international is about 25% to 27% of sales, and it's been a growth area with less price competition than in the U.S. So Akamai, Limelight and Level 3 are trying to move out more internationally. It's an area where you have to grow organically because there are very few companies that have any sort of CDN scale internationally that you can buy to grow through an M & A strategy. Akamai and Limelight have to expand their international sales forces in order to sell to media companies and large enterprises, and convince them that they should use their CDN in order to scale and accelerate their Web applications.
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