Quit Calling Akamai Expensive

Did everyone jump off the Akamai (Nasdaq: AKAM  ) bandwagon when I was on vacation last month? Apparently. Here's how Standard & Poor's analyst Scott Kessler put it in yesterday's edition of The Wall Street Journal: "In the past, there was some justification for Akamai's high stock because it operated in a near-monopoly, but it's different today. It's too expensive even now." (Emphasis mine.)

With all due respect to Kessler and S&P -- surely among the very best in the analyst biz -- you've got to be freaking kidding me, right? Didn't he read the earnings report? Doesn't he know this business gushes cash?

Oh, look, I landed on Boardwalk!
To be fair, Kessler was referring to both Akamai and Limelight Networks (Nasdaq: LLNW  ) , which soared 48% on the day of its June IPO. That stock has since struggled, thanks mostly to a string of less-than-perfect earnings reports. Yet revenue growth continues to top 40%.

Part of the problem, Kessler and others reason, is increasing competition. For example, Level 3 Networks (Nasdaq: LVLT  ) , which owns miles of its own fiber, has promised to slash costs on content delivery services. Akamai, Limelight, and Level 3 are all competing for lucrative streaming-video deals.

There's also InterNAP (Nasdaq: INAP  ) , which was an Akamai partner before buying VitalStream. Like Limelight, it had been on a tear, regularly reporting revenue gains greater than 30%. But in Q3, it narrowly missed Street revenue estimates, and the shares took a hit.

See the pattern here? Even if the Street isn't satisfied, Akamai and its peers are sprouting like weeds on Miracle-Gro. More on that in a minute.

How to do what Akamai does
First, let's deconstruct the three most prevalent myths in which Akamai bears place so much faith:

  1. Everyone does what Akamai does. This myth is mostly perpetuated by analysts like Kessler, who assume that Google (Nasdaq: GOOG  ) , which now hosts some content at Google News, could kill Akamai if it chose to host more. Anyone with a network, these folks reason, could be an Akamai competitor. They're only partly right -- there's a lot more to Akamai than the 28,000 servers it has deployed around the globe. More on that below.
  2. Akamai's network is out of date. This myth is perpetuated by Limelight and up-and-comers such as BitTorrent and BitGravity. But it depends on a fundamental misunderstanding of what Akamai does and doesn't do. Akamai is neither a data-center operator nor a broadband reseller. It is a software company, built upon a custom algorithm that monitors the Web and determines the best path for data. Forget the network; remember the software.
  3. There aren't enough customers to go around. This myth arises from news reports like the one that revealed that Limelight is broadening a content delivery deal with Microsoft (Nasdaq: MSFT  ) . But Limelight's gain isn't Akamai's loss. Firms often split duty among content networks, for the same reason investors spread capital among several different stocks: the security that diversification provides.

How do you do, AkaGoo?
So, to review, here's what we know:

  • Akamai and its peers are growing very fast, which suggests the content delivery market as a whole is still in its infancy.
  • No one does exactly what Akamai does, and because its business is based on software, it can be tuned and improved very quickly. (And often is.)

Now, if this is all true, the best way to think of Akamai is to think of Google. Look at the parallels:

  • Both operate in a business that's easy to enter but hard to perfect.
  • Both dominate the markets they serve.
  • Both are easily misunderstood.
  • Both are built on a software algorithm that can be rapidly tuned, and which enables the creation of new services.

I know what you're thinking: I've just proved Kessler's point, because DoubleGoo, like Akamai, is expensive. But is it? I'm not so sure:


2008 Projected P/E

2008 PEG











Not avail.


Level 3 Networks



Source: Capital IQ, a division of Standard & Poor's.

What do you know? Akamai, when comparing its projected earnings to its long-term expected growth rate, which can be an excellent strategy, isn't quite the bargain InterNAP is, but it's also pretty darn cheap.

Color me unsurprised. Rocket stocks like Akamai are very often the cheapest you'll find. Not that you'll ever hear that from the Street. They're too busy making sure their own expectations are met.

Be glad when Akamai fails to comply. It's times like those when the most money gets made. Times like, you know, now.

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Tim Beyers

Tim Beyers first began writing for the Fool in 2003. Today, he's an analyst for Motley Fool Rule Breakers and Motley Fool Supernova. At, he covers disruptive ideas in technology and entertainment, though you'll most often find him writing and talking about the business of comics. Find him online at or send email to For more insights, follow Tim on Google+ and Twitter.

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