Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, thousands try to glean what they can from his thinking processes and track his investments.
While we can't know for sure whether Buffett is about to buy Akamai (Nasdaq: AKAM ) -- he hasn't specifically mentioned anything about it to me -- we can discover whether it's the sort of stock that might interest him. Answering that question could also inform whether it's a stock that should interest us.
In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo-jumbo businesses.
Does Akamai meet Buffett's standards?
1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.
Let's examine Akamai's earnings and free cash flow:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Akamai has grown its earnings and free cash flow significantly over the past five years.
2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.
Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.
|
Company
|
Debt-to-Equity
|
Return on Equity (LTM)
|
Return on Equity (5-Year Average)
|
|
Akamai
|
0%
|
9%
|
9%
|
|
Level 3 Communications
|
N/A*
|
N/A*
|
N/A*
|
|
Limelight Networks (Nasdaq: LLNW )
|
1%
|
(12%)
|
(21%)
|
|
Internap Network (Nasdaq: INAP )
|
26%
|
(3%)
|
(14%)
|
Source: Capital IQ, a division of Standard & Poor's. *Not applicable due to negative equity.
Unlike its loss-making peers, Akamai tends to generate moderately low returns on equity while employing no debt.
3. Management
CEO Paul L. Sagan has been at the job since 2005. Prior to that, he was the company's COO and has worked at media companies like Time Warner and Time New Media.
4. Business
In the grand scheme of things, Internet content delivery is somewhat susceptible to technological disruption, but not as much as other tech-related industries.
The Foolish conclusion
So, is Akamai a Buffett stock? Well, it's a mixed story. Whether or not Buffett would buy shares of Akamai, we've learned that while it operates in a tech-heavy industry and doesn't particularly generate high returns on equity, it does exhibit some of the characteristics of a quintessential Buffett investment: consistent or growing earnings and tenured management.
If you'd like to stay up-to-speed on the top news and analysis on Akamai or any other stock, add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.
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