Calm down, Fool. I haven't pulled support for Akamai Technologies (Nasdaq: AKAM ) , a Motley Fool Rule Breakers pick I singled out more than a year and 155% ago.
Think of this instead as an exercise. Every now and then, I review the bear case for my holdings, to see whether the investing thesis has changed materially. When it does, I sell -- but that's rare. More often, I find that in honestly reviewing the risks, I'm emboldened by my choices. Let's review the potential pitfalls for Akamai with that in mind.
Risk No. 1: Valuation
Growth stocks are, by nature, expensive, and Akamai is no exception. Check out how the content-delivery king compares with peers in its sector:
VitalStream (Nasdaq: VSTH )
SAVVIS (Nasdaq: SVVS )
Akamai is easily the most expensive on a price-to-sales basis. That's the fairest comparison, because neither VitalStream nor SAVVIS is profitable at the moment. Still have doubts? Fine. Consider that Akamai's forward P/E of 32.3, as measured by Yahoo! Finance, exceeds that of mega-growerGoogle (Nasdaq: GOOG ) , which trades for a little less than 31 times expected income.
Risk No. 2: Substitution
What's more, many alternatives exist to Akamai. For example, rumors persist that Google plans a massive network that will sit alongside the Web. That's unlikely to kill Akamai, given all the other services it offers besides bandwidth, but it won't help, either.
Moreover, the secret sauce of Akamai -- that it sees the whole Web, and is therefore able to navigate it better than a pure bandwidth-driven approach -- could be nearly duplicated by network-connected hardware that cooperatively observes traffic and automatically steers data along the fastest route. Cisco (Nasdaq: CSCO ) and Juniper (Nasdaq: JNPR ) are both capable of pulling off such a feat.
Open-source alternatives such as BitTorrent are also gaining traction. While not generally considered as reliable or secure as a CDN, BitTorrent has earned fans, includingWarner Music Group. Continued commercial adoption of the technology could entice developers to dramatically enhance the technology, crimping Akamai's growth in the same way that the JBoss open-source application server hurt BEA's results.
Risk No. 3:Competition
If that seems unlikely, think again. Akamai's competitors are getting stronger by the day. VitalStream recently emerged from the Pink Sheets to earn status as a citizen of the Nasdaq. Meanwhile, privately held Limelight Networks shows all the signs of an emerging Baby Breaker.
Limelight is so threatening that Akamai and MIT, which holds the patents that drive Akamai's business, sued the upstart in June. What's more, a recent Forrester Research (Nasdaq: FORR ) study concluded that Limelight was a low-cost leader and that "its financial health, client experience, and network capabilities make Limelight a worthy option" for those seeking a CDN. Many have taken Forrester's advice, including MySpace and the cultish YouTube video-sharing site. Ouch.
Not exactly a Breaker on the brink, but ...
Akamai remains a great company, a market leader, and an innovator. But when Rule Breakers face Baby Breakers, there's bound to be trouble for Papa. I wonder if that's what Akamai faces right now. At the very least, it has more competition and a higher valuation than it did a year ago, and neither bodes well for short-term shareholder returns. Invest accordingly.
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Despite the bearish doldrums, Fool contributorTim Beyersremains a happy Akamai shareholder. You can find out what else is in his portfolio by checking Tim's Foolprofile. The Motley Fool has an ironcladdisclosure policy.