How to Play Akamai in 2011

Each year, we take a look back in order to look ahead. We do this by industry, by trend, and ultimately by stock. Here's a closer look at Akamai Technologies (Nasdaq: AKAM  ) , Fool style.

Foolish facts

Metric

Akamai Technologies

CAPS stars (out of 5) ****
Total ratings 3,115
Percent bulls 95.8%
Percent bears 4.2%
Bullish pitches 432 out of 454
Highest rated peers Spark Networks, PHOTOCHANNEL NETWORKS, Artificial Life

Data current as of Dec. 30.

Though the stock has ended on a whimper, 2010 has given Akamai investors reason to shout for joy. Fools who bought in January and held on have been rewarded with an 88% gain. Will 2011 bring investors more of the same? Many Fools seem to think so.

"Cyber Monday sales increased 19.4% according to Coremetrics, and this is one sector that is continuing to drive results year over year," wrote Foolish investor gwcummings this month. "Akamai allows e-commerce retailers to keep sites up when there is an influx of traffic without buying more servers. This is why I believe Akamai will continue to drive more revenues and more clients in the future."

Looking back to look forward
E-commerce is a significant business driver for Akamai. But it wasn't often the theme of this year's coverage of the stock at Fool.com:

  • Growth wasn't even in investors' vocabulary in February, when a 12% gain in revenue and a 1% boost in non-GAAP per-share earnings disappointed investors seeking more from Akamai's fourth-quarter report.
  • By July, investors still weren't convinced. Shares of Akamai sold off after the company reported a 20% improvement in revenue and a 17% gain in per-share normalized earnings for the second quarter. The Street also ignored the impact of former Madison Avenue executive David Kenny, who joined the company as president. Kenny's role? Add heft to one of Akamai's more intriguing value-added services: digital ad delivery.
  • In the middle of all this, Akamai filed a patent-infringement suit against Cotendo over its partnership with Google (Nasdaq: GOOG  ) . The two companies have built a system for accelerated delivery of cloud-computing data over Cotendo's network, using technology derived from the mod_pagespeed open source project.
  • Finally, an appeals court judge this month affirmed Limelight's claim that it hadn't infringed on Akamai's patents. The ruling officially closed the books on what had been a $45 million victory for Akamai just two years ago.

If that sounds like a rotten way to end a year, you're right. But there's nothing rotten about Akamai's 2010 financial performance:

2009-2010 Quarterly Performance

Q4 2010

Q1 2011

Q2 2011

Q3 2011

Revenue growth 12.1% 14.1% 19.9% 22.8%
Normalized net income growth (16.9%) 12.4% 2.9% 14.1%
Gross margin 81.0% 71.9% 70.7% 69.3%
Return on capital 11.0% 8.4% 7.1% 7.1%

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

And here's what analysts expect from Akamai over the next two years, according to data compiled by Capital IQ:

Capital IQ Estimates

2011

2012

Revenue estimate $1,203 million $1,382 million
Normalized profit per share estimate $1.64 $1.90

Source: Capital IQ. Data current as of Dec. 30.

Foolish outlook: Bullish
As of this writing, shares of Akamai trade for 29 times 2011 estimated earnings and 25 times 2012 profits. Neither multiple is cheap, but are they as expensive as the bears would have us believe? I'm not buying it. We're far too early in the online video and e-commerce adoption curve to call an end to Akamai's go-go growth opportunity.

Still, if you're nervous about the valuation, why not try the LEAPs? Long-term call options with a strike price of $50 a share trade for $11.24 as of this writing. (Click here to learn more about using LEAPs to enhance returns.)

Now it's your turn to weigh in. What do you think of Akamai's prospects at current prices? Use the comments box below to explain your thinking. You can also rate Akamai in Motley Fool CAPS.

What will be next year's best stock? The Motley Fool has created a brand new free report called The Motley Fool's Top Stock for 2011. In it, we reveal the little company set to profit from the broadband Internet expansion. Get instant access by clicking here – it's free.

Interested in more info on the stocks mentioned in this story? Add Akamai Technologies, Limelight Networks, Level 3 Communications, Google, or Netflix to your watchlist.

Akamai and Google are Motley Fool Rule Breakers recommendations. Google is also a Motley Fool Inside Value pick. Netflix is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He owned shares of Akamai at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of Google and is also on Twitter as @TheMotleyFool. When it comes to stocks, the Fool's disclosure policy is a lookie-loo.


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