Taking stock of the Web hosting market

Despite the turbulence in the stock markets last week (yet again), it was encouraging to find that Web hosting companies are weathering the financial crisis reasonably well.

You might even say that some continue to fire on all cylinders regardless of the market distress.

Web.com (WWWW) reported third quarter 2008 results on Nov. 6th and in his opening remarks, I was delighted to hear this from the CEO, David Brown:

"To put things into perspective, the company’s financial strength is the strongest it has ever been in the company’s eleven year history with profitability at record levels, annualized operating cash flow at record levels at approximately $25 million and growing."

Web.com reported total revenue was $30.6 million for the third quarter of 2008, an increase of 72% compared to $17.8 million for the third quarter of 2007. Cash flows from operations were $6.2 million, up 45% compared to $4.3 million for the third quarter of 2007.

Brown adds: "Web.com has an opportunity to emerge from the current economic crisis in an even stronger position."

Basically my interpretation is: Crisis? What crisis?

For investors in the company, it's another story altogether. The stock price got rocked from its open of $4.78 on Monday Nov. 3 to its $3.91 close on Friday Nov. 7th. But again, the business is strong even though the whims of the market indicate otherwise. Ask any investor and you'll find that even the mighty blue chips with strong balance sheets are suffering the same fate.

Okay, that's just one company, you're thinking. That's hardly a trend. Let's look at Rackspace (RAX) that reported 3Q 08 numbers on Nov. 5th. Net revenues for the third quarter ended September 30, 2008 were $138.4 million, up 5.8% from the second quarter of 2008 and up 44.0% from the quarter ended September 30, 2007. CEO and President, Lanham Napier said: "In this tough economic climate, Rackspace continues to outperform both the market and our competitors through the acquisition of new customers and the growth of our existing customer base."

The company continues to make acquisitions even while prudently cutting back on capital expenditures for the rest of 2008.

Navisite (NAVI) also reported at the beginning of last week. CEO Arthur Becker happily pointed out that revenue for the fourth quarter fiscal ’08 that ended on July 31, 2008 was $40.2 million representing an increase of 16% compared to the $34.7 million reported in the same quarter last year. For the full fiscal year 2008 revenue was $154.6 million representing a 22% increase over the $126.2 million reported in fiscal year 2007.

Becker is projecting "an increase of between 3% and 4%" in the next quarter. But that wasn't enough to keep the stock price from taking a beating last week after opening at $0.66 on Monday and closing at $0.38 on Friday.

The Web hosting business is solid. Companies continue to make money, add customers and make sensible decisions regardless of any market turmoil. Mr. Market isn't always rational, as we know.