Foolish Forecast: Don't Miss the Akamai Rocket

• Email
• Share
• Print

We're living in the early days of the digital age, where massive bandwidth is a precious, precious commodity. Akamai Technologies (Nasdaq: AKAM) has one solution to that conundrum -- make the Net work more efficiently. Check out last quarter's results and then get back here for a quick look at the current situation. You're going to like what you see, even if the Street doesn't.

What Fools say:
Here's how Akamai's CAPS scoring rates against some of its peers and competitors:

	Market Cap (millions)	Trailing P/E Ratio	CAPS Rating
VeriSign (Nasdaq: VRSN)	$7,520	181.0	**
Level 3 Communications (Nasdaq: LVLT)	$5,100	N/A	***
Akamai	$5,040	62.5	****
NeuStar (NYSE: NSR)	$2,230	28.2	****
Digital River (Nasdaq: DRIV)	$1,220	20.3	****

Data taken from Motley Fool CAPS on 02/05/08.

One bullish CAPS rating comes from SmartGuyStocks: "We've heard the 'commodity' and 'increased competition' worries for years now, and yet the company continues to deliver stellar growth. If you believe in the growth of online content delivery (and who doesn't), [Akamai] will continue to outperform."

The bears are scarce at the moment. One who ventured a pitch doesn't see any earnings growth happening. Allow me to rebut that grizzly concern right here.

What management does:
Despite a shrinking gross take, the bottom-line margins are improving. That's because of tight cost controls and growing interest payments from a strengthening balance sheet. And it looks like the earnings growth curve hit a positive inflection point in the fall -- let's see if that encouraging trend continues. No growth? Yeah, right.

Margins	6/2006	9/2006	12/2006	3/2007	6/2007	9/2007
Gross	79.5%	78.8%	78.0%	77.1%	75.8%	74.7%
Operating	21.4%	20.2%	19.4%	19.4%	20.1%	20.7%
Net	14.5%	14.4%	14.2%	14.3%	14.6%	15.2%
FCF/Revenue	20.6%	24.2%	17.5%	17.7%	14.9%	17.8%

Growth (YOY)	6/2006	9/2006	12/2006	3/2007	6/2007	9/2007
Revenue	48.5%	49.4%	51.4%	52.0%	51.2%	50.1%
Earnings	42.5%	41.9%	38.0%	42.0%	51.6%	58.4%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Amid all of these improving results, Akamai's stock price has lost more than 40% of its value in the last year. After failing to blow the average analyst's mind last summer, the shares took an immediate 25% fall that extended down a bit further. Mind you, that wasn't a miss -- just a solid, only slightly spectacular report. Back then, fellow Fool Tim Beyers figured that the stock was priced for 30% annual cash flow growth, and it's 20% cheaper than that today.

This doesn't make any sense, unless the Internet stops working tomorrow or Akamai's biggest customers, like Apple (Nasdaq: AAPL) and Nintendo (OTC BB: NTDOY.PK), cancel their contracts next week. Neither scenario is likely, as the world hungers for ever-richer online content and Akamai is just the company to distribute that. This growth story has hardly even begun yet, and you can still get in for cheap.