Joe Oddlot 1, Wall Street 0

Last week, Akamai Technologies (Nasdaq: AKAM  ) became a multibagger, up 105% and counting for our Rule Breakers newsletter service. And I want to celebrate. Not because I'm smart, or because I was right (that's yet to be determined), but because I'm you.

No, really, I am
My first encounter with The Motley Fool dates back to 1998, when my wife and I, newly married, discovered we were more than $45,000 in debt. The Fool inspired me. How could it not? Common folk, armed with knowledge, daring, and a dash of folly, were batting for financial freedom, and winning.

It was exactly what I needed to hear. So, over the next three years, we scrimped, saved, bought a house, had a son, and became debt-free. That's no longer true (we've accumulated a daughter and another son, as well as some credit card and business debt), but our financial position remains remarkably sturdy, much more so than it was in 1998.

Thrown into the deep end
That's why I invest today. Of course, getting to this point wasn't simple. But it wasn't excruciating, either. I followed David and Tom Gardner's advice. I read all the right books, refined my approach through online courses at Fool.com (here's a list), and then -- gulp -- got in the game.

I wasn't successful immediately. (Ask me about Amazon.com (Nasdaq: AMZN  ) sometime.) But that only increased my determination. So I went back to Fool's School, read more from the masters, and ultimately came to understand valuation and company analysis techniques. Before long, I was working through financial statements, creating spreadsheets, and, best of all, writing up my opinions of stocks at the Fool's discussion boards.

The need for speed
Fast-forward three years. The skills I've learned here I used to pick Akamai. My thesis was that its position as the leading provider of Web content delivery -- think iTunes, virus patches, video, and, yes, even Fool.com -- created a massive and durable competitive advantage.

It also happened to be an excellent, fast-growing business buttressed by the twin pillars of accelerating sales and expanding margins. Last Wednesday, the story got even better. For the fourth quarter and fiscal 2005, Akamai reported sales growth of 44% and 35%, respectively. Compare that to last year at this time. Revenue climbed 27% in Q4 2004 and 30% over the full year.

And margins? Have a look:

Margins

Q4 03

Q4 04

Q4 05

FY 03

FY 04

FY 05

Gross

71.1%

80.6%

80.5%

62.3%

78.0%

80.3%

Op.

9.8%

25.3%

25.5%

N/A*

23.3%

25.9%

Net

N/A*

23.3%

31.2%**

N/A*

16.4%

115.8%**

*Akamai posted negative earnings in fiscal 2003.
**Includes one-time tax benefits.


Four questions
That's outstanding performance, but can it continue? There's no way to know for sure. We can, however, make an educated guess using a four-question test called a sustainability analysis:

  1. Can a competitor easily duplicate Akamai's competitive advantage? No. Its secret sauce is a patented algorithm, and its global network of servers would take months to imitate well. Still, the open-source BitTorrent technology isn't to be taken lightly.

  2. Can a competitor substitute a better strategy? Maybe a large data center operator. Take Google (Nasdaq: GOOG  ) , for example. It could add intelligence and bandwidth to its vast network that would, in effect, reduce Akamai's edge.

  3. Can someone prevent Akamai from executing its strategy?Apple (Nasdaq: AAPL  ) or Microsoft (Nasdaq: MSFT  ) could decide to pull their business, either of which would seriously hurt revenue. Yet neither seems likely to me. Akamai provides millions in sales for these and many other customers.

  4. Is there wasted energy inside Akamai that stands in the way of effective execution? Unlikely, particularly in light of the company's rising margins.

In other words, Akamai is in a great position now, but that could change if Google were to mount an assault, or if Apple or Microsoft decide Akamai's services are no longer needed. Each represent big risks to the company, and deserve a watchful eye.

The Foolish bottom line
Recently, our Foolish leaders asked me what my competitive advantage is as an investor. Know what I said? I'm a Rule Breaker: a liberal arts degree-wielding, accounting-ese-hating, company analysis-loving, always-learning, just-wants-to-retire-rich Fool. And you can do it, too. Click here to be our guest at Rule Breakers free for 30 days. What are you waiting for?

Microsoft is an Inside Value selection, and Amazon.com is a Stock Advisor selection.

Fool contributorTim Beyersloves being called a complete Fool. He invites you to join the fun. Tim owns shares of Akamai. You can find out what else is in his portfolio by checking Tim's Foolprofile. The Motley Fool has an ironcladdisclosure policy.


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