My friend Rick Munarriz is trying a Jedi mind trick on you. He's telling you that Amazon.com
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
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
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
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
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:
- Read Rick's original argument and rebuttal.
- Will this retailer be the next Amazon?
- How to get in on the next millionaire-maker megatrend.