Black Friday Bargain Stock: Akamai

Tech is dirt cheap right now. But few tech stocks are as cheap as Rule Breakers pick Akamai Technologies (Nasdaq: AKAM  ) , thanks to its minuscule 0.85 PEG ratio.

Now, to be fair, the PEG is anything but a perfect metric, since it compares projected growth -- that is, Wall Street's best guess -- with a forward-looking P/E ratio. Were you to instead perform a discounted cash flow analysis of Akamai, you might find the stock to be expensive, as S&P did.

Such is the nature of growth investing.

But is that really so bad? Not at all. Rocket stocks like Akamai are often the best values you can buy. They'll take decades to reach orbit, setting dozens of record highs along the way. For these stocks, the PEG is a highly useful measurement, for it ascribes value in context.

Put differently: Where is a Black Friday sale worth more? Wal-Mart? Or Nordstrom? Exactly.

Cheap stocks, in context
Back to the PEG. Here, it shows you just how good my Fool compadres are at picking superior stocks. (Bummer.) Have a look at how Akamai compares to the five fastest growers in today's throw-down:

Company

2008
Projected P/E

2008
PEG

Volcom (NASDAQ:VLCM)

14.44

0.60

Zumiez (NASDAQ:ZUMZ)

21.18

0.76

ViroPharma (NASDAQ:VPHM)

12.21 0.81

Akamai Technologies

22.06

0.84

Tata Motors (NYSE:TTM)

13.58

0.94

Dr. Reddy's Laboratories (NYSE:RDY)

15.09

1.49

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

Yeah, I see it, too. Clothing company Volcom looks like a screaming buy. So does ViroPharma. So does ... Oh, heck, they all look like great stocks.

So that's it, right? We're done? Not so fast. Just as the PEG aims to measure the value of a stock in context, we analysts, in using it, must take steps to understand the quality of the growth that undergirds our assumptions.

The price of a premium
Can we assume that Akamai will improve its bottom line by at least 26% annually over the next five years, as the Street predicts? I think so, for Akamai boasts an extraordinary competitive advantage.

Here's how a bearish researcher from Deutsche Bank, who attended Akamai's analyst day earlier this month, described it to the good folks at RTT News:

The analyst came away from the detailed review of the business ... with the belief that Akamai has a differentiated technology solution relative to traditional [content delivery networks] and a long-term sustainable competitive edge. (Emphasis added.)

Once again, folks, this analyst is bearish on Akamai over the short term.

But over the long haul, he sees a stock that's worth owning. Why don't we break down the elements of the edge in which Deutsche Bank places so much faith? There are three:

  1. Software. Contrary to popular belief, Akamai's primary advantage isn't with its network of 28,000 servers but with a patented software algorithm, which, in the past, it has successfully protected via the courts.
  2. Scale. Even though the network isn't as important as the algorithm, we ought not forget it, either. Akamai spent billions in capital to develop global relationships with Internet service providers that host its servers. Duplicating that wouldn't just be expensive; it could be impossible.
  3. Balance sheet. Akamai, with more than $500 million in cash and investments and $200 million in debt that's practically guaranteed to be converted into stock (which, by the way, has already been accounted for in Akamai's diluted share count), has more than twice as much net cash as any of its peers.

Do you know any other digital firm that boasts similar advantages? What's that? Google (Nasdaq: GOOG  ) , you say? Indeed, sir. Like DoubleGoo, Akamai is a well-funded gorilla that dominates its industry today and, if the skeptics are to be believed, should continue to for years to come. What other stock in this contest can claim that?

None, I'd say. If you agree, go to this page in our 100% free Motley Fool CAPS research database and rate Akamai to outperform the S&P 500. Our editors will tally your votes and reveal your choice for the best Black Friday bargain stock next week.

Ready for more Fool-light specials? Dash to the rest of the series here.


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