Is Akamai Destined for Greatness?

Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what Akamai's (AKAM -0.39%) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Akamai's story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always reported at a steady rate, we'll also look at how much Akamai's free cash flow has grown in comparison to its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Akamai's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Akamai managing its resources well? A company's return on equity should be improving, and its debt to equity ratio declining, if it's to earn our approval.

By the numbers
Now, let's take a look at Akamai's key statistics:

AKAM Total Return Price data by YCharts.

Source: YCharts. *Period begins at end of Q2 2009.

AKAM Return on Equity data by YCharts.

Source: YCharts. *Period begins at end of Q2 2009.

How we got here and where we're going
Akamai could be doing better. It earns only three of seven possible passing grades (losing out on the chance for two more due to a lack of dividend payments), due in part to revenue growth outpacing the gains on its bottom-line numbers. On the plus side, Akamai became completely debt-free over a year ago, which gives the company more flexibility when it comes to managing its resources.

A stock price pulling ahead of fundamentals hasn't dampened the market's love for Akamai, which is up big this year, and remains near the 52-week high reached earlier this month. The reason was a big earnings beat in July, which rekindled the optimism that had been lacking in 2011 as Akamai's core business seemed threatened by upstarts and tech giants alike. Akamai's gains are coming at the expense of rival content delivery networks, particularly Limelight Networks (EGIO 0.28%), which remains embroiled in a patent battle over Akamai's technology.

Akamai got a small PR boost during the 2012 Olympics, which earned NBC parent Comcast (NASDAQ: CMCSA) frequent derision for its poor presentation and inexcusably long delays, which were often undermined by the company's slapdash promotional efforts. Had the media conglomerate brought Akamai on board, such failures might not have happened.

Akamai may have lost out on Netflix's (NFLX 1.74%) decision to build out its own proprietary digital-delivery network, but getting streaming videos from Netflix servers to users' devices hasn't been a particularly high-margin endeavor. Akamai retains Rackspace Hosting (RAX) and Riverbed Technonogy (RVBD.DL) as important partners. Both of those companies have increased their revenue at a faster rate than Netflix over the past few years, pointing to rapid growth in the amount of content they need Akamai's help to deliver. As these companies all grow in tandem, Akamai will need to make sure that it's not sacrificing profitability for the sake of growing its revenue.

Putting the pieces together
Akamai has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.