3 Things You Need to Know About Akamai

Worldwide Invest Better Day 9/25/2012

With Worldwide Invest Better Day upon us, we here at The Motley Fool are profiling dozens of companies that might be worth investing in. Here's a closer look at Akamai Technologies (Nasdaq: AKAM  ) , whose content delivery network aids in cloud computing.

History and overview
In 1998, before the Internet became a medium for accessing, well, just about everything, it had a problem: traffic jams were far too common. Bottlenecks would prevent pages from loading and email from being sent or received. This early version of the web was far too unreliable for Skype, let alone high-volume feed demons such as Facebook (Nasdaq: FB  ) and Twitter.

Dr. Tom Leighton, a professor at MIT at the time, believed the problem could be solved with algorithms. He found a kindred spirit in graduate student Danny Lewin, and together they created the first formulas for handling dynamic routing of Internet content. They started Akamai not long after.

The aim: create a network of servers whose purpose would be to host copies of web pages. Requests would be filled by the nearest available server. Where the Internet had been a jumbled mess of surface streets, Akamai had built the first digital superhighway, including with well-organized network of onramps and offramps.

The business
Lewin died in the Sept. 11, 2011 terrorist attacks, but Akamai has endured. Over the past decade, Akamai's network has grown to support e-commerce transactions, streaming media, and dynamic software applications that exist entirely on the Web. Riverbed Technology (Nasdaq: RVBD  ) and Rackspace Hosting (NYSE: RAX  ) are notable partners in these efforts.

Media remains an important historic sector for Akamai, but it's e-commerce and enterprise clients (i.e., large-scale businesses with substantial online operations) that have driven growth in recent years:

Revenue Gains Attributable to Verticals

2011

2010 

2009 

Media and Entertainment

$45.7

$75.9

($1.2)

Commerce

$46.1

$38.7

$35.0

Enterprise

$33.5

$20.0

$17.9

High Tech

$4.9

$15.0

$8.7

Public Sector

$4.8

$14.2

$8.4

Net Revenue Increase

$135.0

$163.8

$68.8

Source: SEC filings. Figures in millions.

As a company, Akamai has grown substantially by improving the size (and to a lesser degree, the functionality) of its network:

Key Indicators

2011 

2010

2009 

Revenue

$1,158,538

$1,023,586

$859,773

Number of Employees

2,380

2,200

1,750

Revenue Per Employee

$486,780.67

$465,266.36

$491,298.86

Number of Deployed Servers

105,111

84,259

61,553

Revenue Per Sever

$11,022.04

$12,148.09

$13,968.01

Source: SEC filings. Dollar figures in thousands.

Competitive acquisitions have played an important part in the plan. Deals for Speedera in 2005 and Cotendo last year retired costly litigation even as they helped boost margins and improve Akamai’s balance sheet:

Metric 

2011

2010

2009

Revenue Growth

13.2%

19.1%

8.7%

Gross Margin

73.0%

71.8%

70.9%

Net Margin

17.3%

16.7%

17.0%

Cash / Debt 

$849.2 / $0.0

$606.6 / $0.0

$566.1 / $199.8

Source: S&P Capital IQ. Dollar figures in millions.

Here are three other things you, as a potential investor, should take away from this data:

  1. Revenue is growing, but inconsistently. We'd prefer to see accelerating gains here.
  2. Improving margins are a welcome sign. I'd been looking for exactly this sort of improvement before I sold my shares last year. Clearly, I should have been more patient.
  3. With no debt and a rising cash balance, Akamai probably has the resources to withstand a lengthy downturn in its core markets.

The Foolish takeaway
Think about how you invest your own resources. Do you buy what you need at a good price? Do you invest the excess in things that matter, whether for the benefit of yourself, your family, or a cause you care about? Are you careful not to pile up debts you can't pay off? Companies and management teams are subject to these very same tests. Akamai's team has its ups and downs but is trending in the right direction.

Care to learn more? There's plenty of source material freely available on the web:

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Rackspace Hosting and Riverbed Technology at the time of publication. Check out Tim's web home, portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Facebook and Riverbed Technology. Motley Fool newsletter services have recommended buying shares of Facebook, Rackspace Hosting, and Riverbed Technology. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (2) | Recommend This Article (1)

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 September 25, 2012, at 1:35 PM, Wanderer110 wrote:

    Sept 11 attacks were in 2001, not 2011.

  • Report this Comment On October 08, 2012, at 4:39 PM, crca99 wrote:

    Appreciate the analysis. I (thankfully) held AKAM until the dip passed, but may sell soon if I can figure out what my sell rationale is.

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