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Did Akamai Just Become a Screaming Buy?

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Outside investors may not have liked Akamai's (Nasdaq: AKAM  ) second-quarter results, but insiders loved them. Company president David Kenny and CEO Paul Sagan bought into a sell-off, combining to purchase 40,000 shares last week at prices between $38.78 and $39.52 a share.

Why buy at these levels? Neither executive was obligated to purchase anything. Unlike McDonald's (NYSE: MCD  ) , Duke Energy (NYSE: DUK  ) , and Gap (NYSE: GPS  ) , Akamai has no minimum stock ownership requirements for its executives. Kenny and Sagan seem to be buying because they sense a bargain, and they may be right.

Bigger and faster
Akamai improved revenue 20% in Q2, as its closest competitor, Limelight Networks (Nasdaq: LLNW  ) , improved its top line by 17%. Bigger is still better in the web content delivery business.

Akamai also kept gross margin greater than 70% and produced $20 million in free cash flow in its most capital-intensive quarter in a decade. The company spent more than $66 million to expand its network, which now stands at more than 73,000 servers deployed worldwide.

Sagan's and Kenny's buying suggests that the network will continue to get bigger, in an effort to accommodate still more videos, tunes, and software. The natural result? Earnings growth. Big earnings growth. As Sagan said during last month's conference call with analysts:

Online video is creating real business opportunities for customers as we have continued to serve increasingly large online audiences and set records for peak traffic every quarter, there's little doubt that the migration online is happening at an accelerated pace. 

Now he's putting his money where his mouth is. Do you think he's right, or is his buying just a bid for attention? Let the debate begin in the comments box below.

Akamai is a Motley Fool Rule Breakers recommendation. Duke Energy is a Motley Fool Income Investor pick. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He owned shares of Akamai at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool owns shares of Google and is also on Twitter as @TheMotleyFool. The Fool's disclosure policy has its moments. This is one of them, for the record.

Read/Post Comments (4) | Recommend This Article (11)

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.

  • Report this Comment On August 10, 2010, at 3:15 PM, jflurett wrote:

    I was shocked to see the significant drop that morning. I doubled down on Akamai later that after afternoon. When they dropped the following day I tripled down. I'm quite happy with how this has gone. If the opportunity came again, I'd do the same.

  • Report this Comment On August 10, 2010, at 3:21 PM, guntherize wrote:

    Akamai has been at the mercy of outside analysts and shorts after earnings, but if you think the Internet is dying.... Guess again! "Sagan's and Kenny's buying suggests that the network will continue to get bigger." No Kidding... you bet they're backing what they are saying with their own pocket books!

    Akamai will continue to be the 800 lb. gorilla in the room and crush any idea of competition. I've been hearing for years that competition will cut into Akamai's share, but what I've been seeing is the exact opposite, as Akamai continue to increase their customer base and squash any competition rumors. BTW...(Goldman Sachs has a big conflict of interest with their 30% interest in Limelight and should recluse themselves from make negative comments, as they have in the past, about Akamai.)

  • Report this Comment On August 10, 2010, at 3:50 PM, Uruzone wrote:

    While I agree in general with the other comments here (that Akamai will mirror internet growth in general), as an investor, I have to say I'm cautious about calling AKAM a bargain. It's P/E ratio is a hefty 53 as of this writing, whereas one of its largest customers, Apple, is still below 20. If we're talking about serious growth, between these two, Apple seems the better investment. Akamai will continue to be very volatile because that P/E puts heavy burdens on performance. The slightest *perceived* misstep will aways affect Akamai's stock greatly.

    Disclosure: Positions in both Apple and Akamai.

  • Report this Comment On August 11, 2010, at 9:11 AM, Gonzhouse wrote:

    I agree with Uruzone that AKAM is not cheap. But all the great growth stories present the same issue for investors: what is the size when the projected growth rate is unsustainable? I believe we are still a ways off in the web content delivery space. AKAM: 10 fingers and toes up.

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