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Shares of Akamai (Nasdaq: AKAM ) hit a 52-week high last week. Let's look at what's driving these gains to understand what lies over the horizon. Are there clear skies ahead?
How it got here
Few investors would have expected content-delivery specialist Akamai to stomp the Street quite so soundly. The volatile stock's been up and down over the past year, but until its most recent earnings report, Akamai had been leaning toward the middling performance of content-delivery peers Limelight Networks (Nasdaq: LLNW ) and Level 3 Communications (Nasdaq: LVLT ) . After reporting earnings, it was no longer a three-horse race to the bottom -- Akamai broke out in a big way:
Limelight was flying as high as Akamai early this year after reporting strong earnings of its own. Since then, it's been a long way down for Limelight, spurred by a disappointing second quarter and a court ruling against it in an Akamai-initiated patent suit. Level 3's second quarter was perhaps the worst of the trio, with European weakness contributing to wider-than-expected losses.
All three companies face the eventual defection of a major customer -- Netflix (Nasdaq: NFLX ) launched its own in-house content-delivery network this summer, with the goal of serving most of its Internet-hogging data directly. That may be a long-term benefit, as helping Netflix stream millions movies is a low-margin line of business with high demands for additional hardware.
We've taken a look at what pushed Akamai above its peers, so now let's dig deeper.
What you need to know
Akamai's the only one of these three companies that's currently profitable, and it sports a solid net margin as well. However, when examined on a free-cash-flow basis, Akamai's advantage doesn't seem quite so strong:
Price to Levered Free Cash Flow
Net Margin (TTM)
Projected Growth Rate (2013)
Source: Yahoo! Finance. TTM = trailing 12 months. NM = not meaningful due to negative results.
Akamai's not exactly cheap on either a P/E or a price-to-free-cash-flow basis, especially considering the somewhat underwhelming forward growth analysts have estimated. Although losing Netflix may actually improve margins, Akamai might also have to worry about search giant Google (Nasdaq: GOOG ) reducing its cooperation with Contendo, which Akamai acquired last December.
Akamai's capital expenditures have already soared relative to its peers, so further competitive pressure could either solidify its leading position (thanks to superior infrastructure) or undermine its margins if other companies roll out better content-delivery technology:
Where does Akamai go from here? Its profit margin has shrunk over the past few years, even as total profits have more than doubled. Recently, net income has stopped growing, but Akamai's free cash flow growth has outpaced growth in the bottom line by quite a bit:
There is a risk that the company's P/E might shrink again without the bottom line growing enough to sustain further stock-price growth, as it's moved closer to the upper than the lower boundary of its five-year range. However, as long as Akamai maintains its leading position in the content-delivery game, the sum of these changes should remain positive for shareholders.
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