The Boston Globe just published an article about Akamai, a company whose stock chart looks like an ocean wave. The company was as high as $327 during the Internet bubble, sunk down to $.71 cents and then rose from the grave to a post-bubble high of $56.40 earlier this year.
Akamai's stock has cratered in the last year, down 45% since the year's peak in February. It's drop has been exceeded by only five other companies, including Countrywide. Yet traffic on the Web continues to grow.
Akamai’s business is relatively simple to understand. They provide delivery points for Internet content so that the content resides closer to the end-user. In other words, if you live in Alaska and video is being streamed from Boston, Akamai will provide a streaming node close to Alaska so that the data won’t have to travel over the entire network from Boston to Alaska. This increases the chances the data will get there so that the video and audio isn’t choppy or broken up.
Obviously, as more and more audio and video makes it way to the Web, the need for its services will continue to grow. Its stock has fallen for two main reasons that I can see:
- It’s expensive. Even down 45% at 32, the company has a PE of 74.62. Revenue growth is slowing, making it increasingly difficult to support that high PE.
- Margins are getting squeezed. Competition from other companies has forced Akamai to lower its prices. In addition, the company has needed to invest heavily in its infrastructure to meet growing demand. Demand is good but the street likes to see business that can scale without huge infrascture costs, especially a software related business.
Akamai is a solid business. The company reported a $224 million EBITDA in its last quarter. Its market is growing and it is still considered the leader. I think long term it’s probably a pretty good investment.
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