Has Akamai Technologies Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Akamai Technologies (Nasdaq: AKAM  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Akamai Technologies.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

17.9%

Pass

 

1-Year Revenue Growth > 12%

17.9%

Pass

Margins

Gross Margin > 35%

72.7%

Pass

 

Net Margin > 15%

14.8%

Fail

Balance Sheet

Debt to Equity < 50%

0%

Pass

 

Current Ratio > 1.3

3.54

Pass

Opportunities

Return on Equity > 15%

8.9%

Fail

Valuation

Normalized P/E < 20

30.05

Fail

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Akamai Technologies last year, the company has dropped a point after two straight years of scoring six points, with net margin sliding a bit. That hasn't held the stock back, though, which has posted about a 30% gain over the past year.

Akamai has been in the business of facilitating Internet traffic movement for over a decade. By creating networks of servers with local copies of popular web pages, Akamai makes it easier for users to get the content they want more quickly.

More recently, Akamai has jumped onto the cloud-computing bandwagon. With a partnership with Rackspace Hosting  (NYSE: RAX  ) that combines Akamai's content delivery with Rackspace's expertise in cloud hosting services, both companies benefit from efficiency gains. Meanwhile, teaming up with Riverbed Technology (Nasdaq: RVBD  ) has helped Akamai put together a powerful combination of speed and deduplication efficiency in creating hybrid clouds.

But Akamai has some troubling storm clouds on the horizon. Netflix (Nasdaq: NFLX  ) , which has historically used Akamai heavily for delivering streaming content, launched its own content delivery system to boost performance even further. Because Netflix farmed out content delivery to Limelight Networks (Nasdaq: LLNW  ) and Level 3 Technologies (NYSE: LVLT  ) as well as Akamai, many feared that the resulting fallout could hurt all three companies badly.

For now, though, Akamai has stepped away from the pack and posted impressive gains. In its most recent quarter, content delivery grew 23%, with the company's cloud infrastructure also posting an impressive revenue gain of 22%.

For Akamai to improve, it needs to squeeze more profits from its growing revenue and consider ways to boost returns on equity. With the potential of the Internet, though, Akamai has plenty of room to strive toward perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Akamai may face a challenge in losing Netflix, but it's held up a lot better than the once-dominant video delivery company. The precipitous drop in Netflix shares since the summer of 2011 has caused many shareholders to lose hope. While the company's first-mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new deep-pocketed rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why we've released a brand-new premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, with reasons to buy Netflix today as well as counterarguments to avoid the stock entirely. We're also offering a full year of updates as key news hits, so make sure to click here and claim a copy today.

Click here to add Akamai Technologies to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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