Why Amazon Isn't Safe

My friend Rick Munarriz is trying a Jedi mind trick on you. He's telling you that Amazon.com (Nasdaq: AMZN  ) is a better buy than Akamai (Nasdaq: AKAM  ) because Akamai "takes a hit" every time there's a new entrant in the Web content delivery business.

Don't you believe it. I know Rick; he's a great guy, but he's no Jedi.

Actually, these are the numbers you're looking for
Common sense might tell you that Akamai would take a hit every time the next BitGravity or EdgeCast announces itself over the news wires, or that every time a behemoth like AT&T (NYSE: T  ) announces a plain-vanilla CDN, it spells doom for Akamai. But the numbers tell a very different story:

Period

Gross Margin

Trailing 12 months

76.5%

2008

76.9%

2007

77.7%

2006

78%

2005

80.3%

2004

78%

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

Akamai's pricing hit has cost ... less than two points of gross margin in five years. Can I have more doom like that, please?

Common sense doesn't apply when it comes to Akamai. But that shouldn't surprise you; Akamai is a two-time recommendation of David Gardner's Motley Fool Rule Breakers service, to which both Rick and I contribute. Rebel stocks don't abide by conventional rules.

Why more competitors doesn't equal better competitors
Let's remember that market leaders often deflect competition. Take Google (Nasdaq: GOOG  ) . Detractors love to point how it's "just" a search engine. Anyone can enter the business and, seemingly, almost everyone has. So why did Cuil implode? Why does Google continue to gobble up market share?

Amazon has similarly defied skeptics when it comes to e-tailing. But it's on the losing end of the equation when it comes to music and video downloads and delivery. Try as it might to become the leader in this emerging market, Apple (Nasdaq: AAPL  ) and Netflix (Nasdaq: NFLX  ) still have the better-known brands. Amazon's deep discounts haven't resonated with users -- not enough, anyway.

You might even say that Amazon is cornered. Cloud computing is a growth area, sure, and Amazon's Web Services platform serves Twitter -- but, on balance, probably not as well as a bigger service provider might. There's irony in that: Akamai's problems in the CDN business, as Rick describes them, mirror Amazon's troubles in the cloud.

The network design is the advantage
When it comes to Akamai, you need to know that network design matters. Instead of centralizing delivery via a handful of very large and well-stocked data centers, as Limelight Networks (Nasdaq: LLNW  ) does, Akamai has a highly distributed design, with tens of thousands of servers functioning in locations around the globe. Content is split apart upon entering the Web, and then reassembled a la Star Trek's transporter.

Akamai's years of success serving very large clients testify to the effectiveness of this approach. We also know that at least one other highly touted startup, JAJAH, follows a similar network design; a few of my teammates and I visited this Rule Breaker in the making last fall.

So don't write off Akamai just because it has competition. Don't write off Amazon, either. Instead, keep this contest in context: Both firms face serious competition, yet neither has been forced off its game.

Unfortunately for Rick, investors know this about Amazon. They've bid its shares to the moon thus far in 2009. Akamai has attracted far fewer believers. Investors don't trust that Akamai's current advantages are durable, even if the evidence strongly contradicts them.

In other words, Akamai is still cheap. Amazon isn't.

Get your clicks with related Foolishness:

Akamai and Google are Rule Breakers recommendations. Amazon, Apple, and Netflix are Stock Advisor selections. Try any of these Foolish services free for 30 days.

Fool contributor Tim Beyers had stock and options positions in Apple and Google and a stock position in Akamai at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy is still out of board wax. Bummer.


Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 26, 2009, at 5:54 PM, joegurguis wrote:

    I suppose then I should sell my UPS shares and buy Wal-Mart because clearly Wal-Mart, having a huge delivery network and much more money, will surely soon be the dominant player in generic package delivery.

    I'm not seeing the comparison. I think the comparison only works if you believe that global telecommunications has now reached full maturity and the complexities of Akamai's business will soon not matter. Since I can still imagine many more advancements that have yet to materialize, I strongly doubt that this is the case.

  • Report this Comment On May 26, 2009, at 5:56 PM, joegurguis wrote:

    Oops. That comment was meant for the pro-Amazon story. Not sure how it got on this one.

  • Report this Comment On May 26, 2009, at 11:42 PM, kellogg9 wrote:

    What is a bit surprising about Akamai's design vs say Limelight is that it seems obvious to do (and i am not talking in terms of hindsight). If you are doing a business of content delivery it is obvious you need to have a distributed platform where you split the data across many servers.

    The reason Amazon has succeeded in its field is like how Apple has in terms of music and video, its because they took time to understand their clients and the problem at hand. I notice very commonly that new company's dont spend enough time on that and end up on the wayside for it. Akamai is succeeding because they did something logical..they did their homework..

    Kelly - http://www.stockcoupons.com/

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