This Just In: Upgrades for Akamai

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
A choppy, post-T-Day week ended on an up-note Friday, as markets glowed faintly green -- and above the sea of relieved sighs, actual cheering could be heard from at least a few investors. Who were these happy souls?

Shareholders of Akamai (Nasdaq: AKAM  ) , which jumped over 5% Friday. And what was the reason for their elation?

That, Fools, is the heart of today's story.

Two cheers for Akamai!
Not one, but two separate analysts issued upgrades for this content delivery facilitator Friday. "Analyst A" cited an evident resurgence in e-commerce, and predicted an imminent recovery in online ad spending in 2010 and, farther out, the emergence of hi-def Internet video as a revenue driver over the next 18 to 24 months. "Analyst B" likewise saw an "improving outlook" for Internet media, entertainment, and e-commerce sites, and furthermore praised Akamai's strong balance sheet and free cash flow.

Now here's the bad news: These two mystery analysts were Citigroup and Oppenheimer.

Let's go to the tape
Why is that "bad news?" Well, consider their records. Citigroup ranks in the bottom third of investors tracked by CAPS, scoring a bare 50% record for the accuracy of its picks. Oppenheimer's rep is slightly worse: ranked in the 40th percentile of CAPS investors overall, fewer than half of Oppenheimer's recommendations beat the market.

And now for the worst part: Within the specific niche of Internet Software and Service providers that Akamai inhabits, both Citigroup and Oppenheimer are doing even worse than their overall records would suggest. Oppenheimer's active ISS picks include such losers as:


Citi Says


Citi's Picks Lagging S&P by (Nasdaq: NTES  )




eBay  (Nasdaq: EBAY  )



8 points

IAC/InterActiveCorp (Nasdaq: IACI  )



14 points

While Citigroup's gaffes include:


Oppenheimer Says


Oppenheimer's Picks Lagging S&P by

Sina (Nasdaq: SINA  )



32 points

Yahoo!  (Nasdaq: YHOO  )



50 points (2 picks)

MercadoLibre (Nasdaq: MELI  )  



225 points

All of which argues against taking either analyst's advice on anything Internet-related -- Akamai included.

And yet ...
And yet I have to admit, their records notwithstanding, I find it hard to fault the analysts' logic on why Akamai might in fact be a buy. Citi, for example, argues that Wall Street's expectation of just 1% earnings growth out of Akamai next year may be conservative. Akamai does a lot of business facilitating "online advertising and online sales," you see, and according to Citi, both these markets are expected to grow in the double-digits in 2010. This being the case, it's unlikely that "two of Akamai's biggest end markets can grow in the double digits in '10," yet Akamai itself would remain basically flatlined at 1%.

Similar thinking has Oppenheimer predicting 7% revenue growth for Akamai next year. Oppy further emphasizes the fact that Akamai gets about half of its revenues from "value-added services."

Foolish takeaway
Now don't get me wrong: Akamai bears have good reason to discount last week's upgrades -- bad analysts tend to make bad guesses, after all. And with Akamai shares selling for more than 13 times free cash flow, and a whopping 31 times trailing earnings, there's not a whole lot of room for error at these prices. (So it's little wonder that investors have sold short more than 15% of Akamai's shares.)

Still, it's worth considering what might happen if the analysts are right about the growth in Internet traffic next year and, even more so, about the added services Akamai is offering. Faster-than-expected growth in either (or both!) could make consensus projections for Akamai look conservative in a hurry. In which case, investors might be wanting to own, rather than short, Akamai's shares.

Personally, I don't know that this will happen, and at these prices, I'm not willing to bet that it will. I do know one thing, though: If it does happen, I don't want to be the guy standing in front of the stampede.

Akamai Technologies, Mercadolibre, and Netease are Motley Fool Rule Breakers selections. eBay and Sina are Stock Advisor picks. eBay has a recommended bull option trade for Motley Fool Options.

Fool contributor Rich Smith does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 858 out of more than 145,000 members. The Motley Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (7)

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1060462, ~/Articles/ArticleHandler.aspx, 10/25/2016 10:30:30 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,234.94 11.91 0.07%
S&P 500 2,150.96 -0.37 -0.02%
NASD 5,304.84 -4.99 -0.09%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/25/2016 10:14 AM
AKAM $59.06 Up +0.22 +0.37%
Akamai Technologie… CAPS Rating: ****
EBAY $29.16 Down -0.06 -0.21%
eBay CAPS Rating: ****
IAC $67.26 Down -0.07 -0.10%
IAC/InterActiveCor… CAPS Rating: *****
MELI $172.25 Down -0.57 -0.33%
MercadoLibre CAPS Rating: *****
NTES $267.64 Up +0.46 +0.17%
NetEase CAPS Rating: ****
SINA $78.24 Up +0.36 +0.46%
Sina CAPS Rating: ***
YHOO $42.54 Down -0.05 -0.12%
Yahoo CAPS Rating: **