2006 in Review: Akamai

Oh how I'd love to claim that I knew Motley Fool Rule Breakers pick Akamai Technologies (Nasdaq: AKAM  ) would rise 171% this year. But that, alas, would be lying.

In February, I thought fourth-quarter results would induce agony among short-term traders who owned shares. My reasoning? At the time I believed that a higher tax rate and a dilutive stock offering could lead to lower-than-expected per-share earnings.

I couldn't have been more wrong. Fourth-quarter sales were up 44%. Profit was up 92%. And management once again raised revenue growth guidance. (Thank Speedera, which was growing by more than 40% annually when Akamai acquired the firm in June 2005.)

By late March, investors had begun to pile into the stock. Akamai's shares surged 58% to $33 as the first quarter closed. Good call: sales rose 51% year-over-year. Operating cash flow, meanwhile, improved by 77%. Akamai's light business model was performing better than anyone had expected, including yours truly. (I even argued the bear case for the shares.)

CEO Paul Sagan remained optimistic. He told analysts that Akamai's torrid growth would continue so long as broadband Internet access gained steam. Right again, and investors cheered. The stock surged 15% as Akamai's Q2 report beat the Street's profit estimate by $0.02. Better still, sales were up 55% as the once-beleaguered dot bomb earned its 2,000th recurring-revenue customer.

But not all was well. Privately-held Limelight Networks was ready to make a run at Akamai with $130 million in funding. So serious was the threat that Akamai filed a patent infringement lawsuit over the summer.

Little about the matter has been said since. And third-quarter earnings were as pleasing as ever for Fools. But not for those covering the stock. Wall Street's worst botched the facts by failing to properly account for a massive tax benefit that had been realized the year prior. The shares temporarily fell back to $46.

The malaise would last just days before the stock once again resumed its climb. Today, Akamai trades for just over $56 a share. Blame Sagan. His optimism is contagious. He told analysts in October that his team's goal is to reach $1 billion in sales before the decade is out.

Party like it's 1999!
Most of the investors participating in Motley Fool CAPS seem to believe it can be done:

CAPS ratings for Akamai

Total ratings

892

Bullish ratings

818

Bearish ratings

74

Bull ratio

91.7%

Bear ratio

8.3%

Bullish pitches

142

Bearish pitches

20

Source: Motley Fool CAPS

Stan Huber, who goes by TMFPlatoish1 and is a Hidden Gems contributor, explains the thesis:

"Akamai [is] in the driver's seat [in] the content delivery space. There will be competitors, but they have the scale to remain dominant. This will become more important going forward, as video explodes online. They also are getting into other areas such as application hosting. I think prospects look good and it's time to party like it's 1999."

Fool's final word
I'll add that Sagan and his team still appear to be deploying capital effectively. Consider the Nine Systems acquisition. With Nine, Akamai will be able to help the content providers with whom it does business to better determine where and how to distribute what they own. That's important; even though Google (Nasdaq: GOOG  ) , Microsoft (Nasdaq: MSFT  ) , and Yahoo! (Nasdaq: YHOO  ) are today's digital Trumps, tomorrow promises a slew of smaller businesses with online aspirations. They'll need content distribution -- and Akamai will be glad to oblige.

Does that means 2007 will be as grand for Akamai investors as 2006 has been? That's a question for another day. Be sure to tune in for our preview on Akamai to see what my thoughts for 2007 are. And, in the meantime, if you're looking for superior stocks ideas, consider Rule Breakers. Including Akamai, David and his team have uncovered six multibagger stocks since this market-beating service was created two years ago. Clicking here will get you 30 days of free access to the entire portfolio of picks. Enjoy, and Happy Holidays.

Check out the other companies featured in "The Motley Fool's 2006 in Review and 2007 Preview" special.

Fool contributorTim Beyers, ranked 1,013 out of 17,523 inMotley Fool CAPS, is a regular contributor to Rule Breakers and a very happy owner of Akamai shares. Get the skinny on all of Tim's stock holdings by checking his Foolprofile. Microsoft is an Inside Value selection. Yahoo! is a Stock Advisor recommendation. The Motley Fool'sdisclosure policygrows in influence daily.


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