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Web 2.0, Akamai Style

I'll be honest: I knew AkamaiTechnologies (Nasdaq: AKAM  ) was a good stock when I bought it in early 2004. I just didn't know it would be this good. To date, the Web content delivery king is up more than 160% since being added to the Motley Fool Rule Breakers portfolio. And more gains could be on the way.

On Wednesday, Akamai reported a 51% first-quarter increase in sales and a breathtaking 70% increase in normalized earnings per share year over year. "Normalized" earnings excluded $0.10 worth of charges for stock-based compensation, amortizing intangibles, and taxes.

My estimate of owner earnings came to $12.9 million, or 14.3% of Akamai's record $90.8 million in Q1 revenue. Though that's lower than the 20% owner earnings margin Akamai has delivered in recent fiscal years, it's consistent with last year's Q1, in which Akamai's OE margin equaled 14.1%. Plus, management said in yesterday's conference call that capital expenditures were front-loaded in Q1 to account for network upgrades, among other things.

Akamai also saw both year-over-year and sequential growth in customer acquisitions, signing another 71 new deals. And its accounts during the quarter were impressive, including the Winter Olympics and the NCAA men's basketball tournament. The popularity of these events and others like them substantially aided the top line, though recurring revenue from its core content delivery service accounted for more than 70% of sales.

Can the momentum continue? CEO Paul Sagan seems to think so. He told analysts in yesterday's conference call that the uptake in broadband adoption has aided his business, and that it will continue to. Analyst firm Insight Research agrees. It recently issued a report that says broadband will find its way to 75% of U.S. Internet users, or 88 million homes, by 2011. That, Insight says, will fuel a $27 billion domestic streaming media market. For perspective, consider that there were 37.9 million broadband Internet users in the U.S. last summer.

In other words, the trend favors Akamai. But is the stock worth it? Well, it's not cheap. At a 20% OE margin on its projected $380 million in 2006 sales, Akamai would book $76 million in owner earnings. The good news is that would equal 29% year-over-year growth. The bad news is that the stock trades for 67 times its forward OE. That means high growth expectations are probably already baked into the stock price for the short-term. So if you buy, be sure it's with the intent to hold till 2016 -- and perhaps beyond.

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Akamai is one of a handful of multibaggers found by the analysts atMotley Fool Rule Breakers. Ask us for abackstage passto Rule Breakers to find out what other stocks are helping David Gardner and his team generate an average return in excess of 26% (vs. just 8% for the S&P 500). It's free for 30 days. And if you subscribe now we'll throw inAround the World in 80 Minutes, which features our analysts' top international stock picks. All you have to lose is the prospect of richer returns.

Fool contributorTim Beyersis still a very happy owner of Akamai shares. You can find out which other stocks he owns by checking Tim's Foolprofile. The Motley Fool has an ironcladdisclosure policy.

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10/27/2016 4:00 PM
AKAM $68.81 Up +1.11 +1.64%
Akamai Technologie… CAPS Rating: ****