Which Way Goes Akamai (AKAM)?

Akamai's stock has risen fallen, and risen again like an ocean wave. The Internet continues to grow and yet Akamai's stock has tumbled recently. I think it's long term prospects are pretty good.

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.

Sol Nasisi
Sol Nasisi: Sol Nasisi is the co-founder and a past president of BestCashCow, an online resource for comprehensive bank rate information. In this capacity, he closely followed rate trends for all savings-related and loan products and the impact of rate fluctuations on the economy. He specifically focused on how rates impact consumers' ability to borrow and save. He also has authored a wee

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Comments

  • Horbus

    August 31, 2007

    It's not a question of growth but whether the company can sustain its lofty PE. Competition, higher inf costs, and slowing top-line growth have many concerned.

  • vince

    August 31, 2007

    Akamai's forward PE is a great 20 or less. That is at the end of 2008, folks.Also,
    The CEO said easrlier this year that Akamai will be a BILLION $ company by 2010.

    The current (2007)estimates for revenue and earnings are $615-625 and $1.27-$1.30/share respectively.
    The above #s dwarf their nearest competitor who lost $ in the last quarterand whohad a reve3enue of about 110million.

    Additionaly Akamai has lawsuit pending against this company. The compny is also facing a multitude of lawsuits brought on by questionable reporting of earnings etBTW: Akamai won a similar lawsuit against another company several years back. The lawsuit is "infringment of certain interlectual properties of Akam's. The judge state, and details are identical to the previous lawsuit.

    Enough said,

    vince

  • SG

    August 31, 2007

    LLNW is not a competion threat. They will be out of business very soon. AKAM has P2P and the edge network which can support high def, fast downloads and less secured p2p (llnw network). AKAM service is guranteed and LLNW ?. LLNW is P2P and can not be used for mission critical applications,sensitive data transmissions and more. Look at what happened to Skype last week running on P2P network.

    P2P is not reliable. AKAM will be there for longtime and for any competion to really compete they have to beat the AKAM patents and lot of capital.

    AKAM almost spent good part of last 10 years developing the network and invested heavily on the resources.

  • David Gersh

    September 04, 2007

    overvalued still. Too much competition. Move to Dell.

  • yuthebest

    September 05, 2007

    Move to Dell??? Hell their services are completely different. Learn the business before submitting a post as stupid as yours.

    vince

  • JoeNPhilly

    October 16, 2007

    Akamai is on a path back to 50. It will buck the market downturn. Its in the center of its space.

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