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Inktomi Investors Trapped by High Values; Fannie Mae for Near Term

Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate merits of individual stocks.

September 05, 2000|JAMES PELTZ and MICHAEL HILTZIK

Inktomi (INKT) Jim: (Don't buy)

Mike: (Don't buy)

Mike: This stock is something of a major departure for us.

Jim: As far as what?

Mike: Well, I believe--you can correct me on this--that Inktomi is the first stock we've discussed whose name derives from the Lakota Indian language.

Jim: You sure we haven't had another one? Anyway, this name--which by the way is pronounced "INK-to-mi"--is Lakota for "clever spider," right? Why do you think they picked that name?

Mike: Well, twee as it is, their Web site suggests it's because they defeat their rivals through wit and cunning.

Jim: Whether they can defend that or not, it's always interesting to look at a company that's selling for 1,700 times its expected annual earnings per share.

Mike: That's a huge change for them, by the way, because just a couple of quarters ago they were selling for infinity times earnings. It's only within the last six months that the company has actually had earnings.

Jim: Now Inktomi is a big "dot-com" company . . .

Mike: Let me interrupt you here to say that I'm not entirely sure it's fair to call Inktomi a dot-com.

Jim: Why not? What do you define as a dot-com?

Mike: I'd define it as a company that mainly provides services to Internet users--not a company that provides the infrastructure for those companies that serve users, which is what Inktomi does.

By my definition, Inktomi is no more a dot-com than Cisco Systems is. Traditionally, Inktomi has provided house-brand search engines for the Internet the same way a food company provides, say, Price Club with all those cereals and mustards and what-have-you that go out under Price Club's private label.

In other words, Inktomi is the technology that actually performs the Web searches for all the well-known search engines, including Yahoo. Now, Yahoo recently replaced Inktomi with for most searches, but Inktomi still has many, many other customers.

Jim: And there's a lot they do besides Web searches. Among other things, aren't they the ones that developed software that lets you do comparison shopping on the Net? And also software that speeds up the delivery of Web pages to your PC? This is a rapidly growing company . . .

Mike: . . . though still small by the scale of things.

Jim: Yes, but in the nine months ended June 30, Inktomi's sales more than tripled from a year earlier, to about $145 million. And as we said, it earned a modest profit in its fiscal third quarter.

However, the share price has taken a real whack in this year's Tech Wreck. The stock hit a high of $241 in late March, and now trades for little more than half that.

Mike: Only half? Gee, so its price-to-earnings multiple based on 2000 earnings estimates is only 1,700 rather than 3,400.

Jim: Precisely. Now, I think a lot of what has happened to the stock has to do with the increased competition in the business of improving the speed and efficiency of Web sites. Inktomi faces rivals no less than such firms as Cisco and Novell. And those are big, big rivals.

Mike: Right. Let me paraphrase Ronald Reagan, not one of my heroes, by saying: "Here we are again."

Jim: That's a mangled paraphrase, but go ahead.

Mike: I'm thinking Inktomi is an excellent company by Internet standards. It has several great businesses that will grow like gangbusters, and it is now profitable, unlike most young Net firms.

But one of these days, Inktomi's stock value is going to have to dwell in the realm of Newtonian physics, which is to say, reality--rather than in the realm of quantum physics, which is to say, weirdness.

Even based on 2001 earnings estimates, which allow for robust growth, the stock's P/E is about 500. In short, I have a lot of respect for the company, but the stock's valuation is completely bananas.

Jim: We're both on the same track here.

Mike: Now I'm not taking a moral stand against high valuations, like many people do, as though there were something sick and twisted about people paying the current price for the stock.

I merely argue that as a practical matter, when a company is selling at this kind of valuation, the risk is high that its herd of investors is going to continue to get culled at various points along the company's--and market's--migration, like wildebeests traversing lion country.

Fannie Mae (FNM) Jim: (Buy)

Mike: (Don't buy)

Jim: Well, Michael, our next stock is Fannie Mae. And I wish, for purposes of this discussion, that this was Fannie the chocolate company, because it would be a lot easier to describe that business than to describe the company that we're talking about.

Mike: Aren't you thinking of Fannie Farmer?

Jim: No, there is a Fannie May chocolate maker, with which Fannie Mae is sometimes confused. Anyway, our company used to be called the Federal National Mortgage Assn. . . .

Mike: . . . which is how it got the nickname Fannie Mae. Then its leaders must have thought, "What the hell? If Consolidated Brands can change its name to Sara Lee, we might as well just be Fannie Mae." So they made that the official company name.

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