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.

• The very next month, respected Akamai-watcher Dan Rayburn reported that the company was cutting prices on some contracts by 50% or more in order to keep business out of the hands of rivals Limelight Networks (Nasdaq: LLNW  ) and Level 3 Networks (Nasdaq: LVLT  ) .

• Around the same time, Netflix (Nasdaq: NFLX  ) named Akamai as its primary content distribution partner. (Remember this; we'll come back to it in a few paragraphs.)

• 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.

• If analysts needed evidence that Kenny was enthusiastic about working for Akamai, they got it in August. He and CEO Paul Sagan purchased 40,000 shares on the open market after the stock dropped below $40. Around the same time, the company announced a partnership with Brightcove to deliver video for some of the web's biggest media properties. Speculation that Akamai would become a takeover target soon followed.

• By October, the bears turned bullish when Sagan said Akamai would generate $1 billion in 2010 revenue and fulfill a goal four years in the making.

• But the euphoria wouldn't last. In November, Rayburn scooped everyone in reporting that Netflix would dump Akamai as its primary CDN service provider because of performance issues. Representatives from both Netflix and Akamai would refute claims of performance issues, but the core of Rayburn's report was correct: Netflix was renegotiating, and Level 3 would rise to handle a huge portion of the company's streaming.

• 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.