Downgrade thumps Inktomi shares

Merrill Lynch analyst Henry Blodget is suddenly worried about Internet valuations. Blodget downgraded Inktomi (Nasdaq: INKT) from an intermediate term "accumulate" to a "neutral" after the company posted a smaller-than-expected fourth quarter loss.

Shares of Inktomi fell 17 3/8 to 103 1/8, or 14 percent.

In a research note, Blodget said Inktomi is still a long-term buy, but in the near term shares are pricey. Valuation hasn't been much of an issue for Blodget, who made his name by putting a $400 price target on Amazon.com (Nasdaq: AMZN) before a stock split.

"When a hyper-growth company such as Inktomi is significantly exceeding top and bottom-line forecasts, valuation is usually not a factor in stock performance," he said. "When the company begins to merely meet or reduce future estimates (top or bottom line), however, valuation usually comes back into play."

Blodget added that Inktomi is trading at nearly 50 times his fiscal 2000 revenue estimate $145 million.

Inktomi posted a smaller-than-expected loss in its fourth quarter Thursday, losing $4.9 million, or 9 cents a share, on sales of $26.2 million. First Call consensus expected the Foster City, Calif. company to lose 10 cents a share in the quarter.

The $26.2 million in sales represents a 217 percent improvement compared to the year-ago quarter when it lost $8.5 million, or 18 cents a share, on sales of only $8.3 million. For the fiscal year, Inktomi lost $24.2 million, or 48 cents a share, on sales of $71.2 million.

Blodget, however, also noted that Inktomi management may be losing some of its focus by chasing new opportunities such as it shopping engine, value-added services and the corporate market. The competitive landscape is also changing, forcing Inktomi to "invest more in sales and marketing and product development than we expected to maintain its leadership position and growth rate."

Blodget upped his revenue estimates and operating loss estimates for 2000. Revenue goes from $130 million to $145 million, but the operating loss estimate doubled, from $12 million to $24 million. Earnings per share estimates went from 10 cents a share to 17 cents a share because of interest income.