Akamai: Follow the Money

Oftentimes investing is like detective work. And, mind you, I'm no Dick Tracy. So yesterday's earnings report from Akamai Technologies (Nasdaq: AKAM  ) presented an interesting challenge.

Akamai owns 80% of the market for speeding up the delivery of words, pictures, and data over the Web. The company reported a $0.02 net loss for the 2003 fourth quarter and an 11% rise in revenue for the year. Management said it was their "best quarter ever" and they expect 20% growth for 2004.

That made investors awfully cheery this afternoon, and they responded by sending the stock up by 25% in mid-day trading.

We Fools tend to suggest you zig when others zag, so the buying spree might make it look like a great time to sell. But is it really? Let's play a short game to find out. I call it: follow the money.

The balance sheet
First stop, the balance sheet. There's good and bad news here, but more bad than good. Cash is at $160 million and working capital (current assets - current liabilities) comes in at $140 million. That's the good news. The bad: Akamai has taken on more debt, raising its total to $386 million, $201 million of which pays 5 1/2% and is due by 2007.

Cash flows
Next stop, the statement of cash flows. Net cash from operations for the quarter comes in at $7 million, but for all of 2003 Akamai's operations needed nearly $20 million from savings to keep the lights on. Ouch.

Now on to our final round, where the points count double. Does Akamai's business generate enough moolah to pay down obligations and fund future growth?

Growth
Assuming management is correct, Akamai should grow revenue 20% to $193 million and earn $0.20 per share on roughly $24 million in net income during 2004. If growth stays brisk, 2005 revenue would jump to $232 million. Revenue for 2006 would be $278 million.

If cost of revenue and operating expenses, which appear to have stabilized, rise no more than 5% a year as a whole, then net income could exceed $60 million by 2006. At that rate, operating cash flow should surpass $40 million.

Is this really possible? Certainly, trends work in Akamai's favor. Virus attacks are generating business from Microsoft (Nasdaq: MSFT  ) and music downloads create added revenues from Apple Computer's (Nasdaq: AAPL  ) iTunes store. Mix in Akamai's steadily increasing business with IBM (NYSE: IBM  ) , EDS (NYSE: EDS  ) , and others for providing the infrastructure for Web-driven business software, and the upside for the firm looks substantial.

So, this time, the investor enthusiasm may be warranted. Is it warranted enough to push the stock up 25% today? Probably not. In fact, we Fools never recommend "piling on" as an investment strategy. With Akamai's business stabilizing, it will be one to watch over the coming quarters. If you own it already, enjoy it. If not, keep an eye out. There's still room for the company to trip up here and there, particularly with the amount of debt it is carrying.

And remember, whenever the market is screaming BUY!, BUY!, BUY! (or the opposite), just do as Fools do: Be rational and follow the money.

Tom Gardner follows the money for investors daily. He can't help himself. Try his Motley Fool Hidden Gems risk-free for 30 days.

Tim Beyers doesn't own shares of any of the companies mentioned.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 505432, ~/Articles/ArticleHandler.aspx, 11/27/2014 1:03:50 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement