Should You Trust Akamai's Management Team?

More than anything else, managers determine returns. They set strategy, hire key team members, oversee operations, and cash paychecks. Every move they make either enhances or destroys shareholder capital.

It pays to know who these men and women are; how they're paid; whether they, too, are owners; and how they perform versus competitors in certain key metrics. In this regular column, I'll examine all that and more with the goal of enhancing our understanding of some of the top stocks in Fooldom.

Next up: Akamai Technologies (Nasdaq: AKAM  ) . Is the executive team of the leading Web-content delivery network doing all it can to earn you outsized returns?

Foolish facts

Metric

Akamai Technologies

CAPS stars (5 max) ****
Total ratings 3,241
Percent bulls 96.1%
Percent bears 3.9%
Bullish pitches 454 out of 476
Highest-rated peers Spark Networks, Photochannel Networks, Internet Initiative Japan

Data current as of Feb. 26.

Whether you trust Akamai's management probably has a lot to do with your holding period. If you're a trader, you don't trust these guys at all. This isn't the sort of beat-and-raise stock story every trader dreams of, wherein breathtaking numbers result in consistently higher guidance and dazzling quarterly returns. Management's too focused on winning the long war.

Rewind to 2006 with me. In October of that year, CEO Paul Sagan boldly proclaimed that his company's goal was to join an elite club of software companies producing more than $1 billion in annual revenue. That may not seem like much now, with all the interest in content-delivery networks and cloud computing. But at the time, Akamai was finishing a fiscal year in which it generated just $428.7 million in revenue. Sagan was asking the members of his sales team to more than double their output. They did.

And they did it while facing a wide variety of challenges. Nearly half of Akamai's revenue comes from low-margin delivery of static Web content, such as cached video. Everyone wants a piece of that market. Level 3 Communications (Nasdaq: LVLT  ) spent $14 million in Q4 to build out its content network to handle traffic from Netflix (Nasdaq: NFLX  ) , which until recently had been relying on Akamai as its primary CDN partner.

Netflix isn't the only one to restructure its deal with Akamai. Last quarter, the company cited lower upfront payments in some large contract renewals as cause for giving worse-than-expected Q1 revenue and profit guidance.

Management overview

Executive

Years

Cash Compensation

Shares Owned*

Paul Sagan, Chief Executive Officer 13 $1,554,804 202,592
David Kenny, President 1 $50,000 33,116
Tom Leighton, Co-Founder and Chief Scientist 13 $20,000 3,746,967**
J.D. Sherman, Chief Financial Officer 6 $824,747 98,965

Source: Capital IQ, a division of Standard & Poor's. (Data current as of Feb. 21.)
*Includes only direct holdings.
**Not directly owned but controlled through several trusts.

But again, this shouldn't come as a surprise. Sagan and his team have proved time and again that they're willing to sacrifice short-term gains for a long-term growth, often with excellent results. In this case, Akamai made concessions to lock in some customers to long-term deals that get sweeter as more content flows across its network.

Sagan's been around long enough to know this is an almost sure bet. He joined Akamai in October 1998, months after Chief Scientist Leighton and the late Danny Lewin co-founded the company. For most of those early years, he served opposite then-CEO and current Chairman George Conrades as Akamai's president. There are very few challenges this tenured team hasn't already dealt with multiple times before.

Management analysis versus competitors

Company

Insider Ownership

Gross Margin

Return on Capital

Return on Equity

Akamai 3.04% 70.4% 7.7% 8.7%
Internap Network Services (Nasdaq: INAP  ) 3.52% 39.7% 0.2% (1.9%)
Level 3 Communications 3.53% 59.2% (0.8%) (372.5%)
Limelight Networks (Nasdaq: LLNW  ) 10.87% 44.0% (6.5%) (8.9%)

Source: Capital IQ, a division of Standard & Poor's. (Data current as of Feb. 26.)

Akamai is a financial powerhouse when compared with its direct competitors. The company boasts better margins and better returns on equity and capital, and it's flush with more than $1.2 billion in total cash and investments on its balance sheet. (Akamai eliminated the last of its debt in 2010.)

Sounds good, right? Sure, but don't get too cocky. This isn't the only competition Akamai faces. AT&T (NYSE: T  ) is offering CDN services from upstart EdgeCast, while Google (Nasdaq: GOOG  ) has teamed with Cotendo, which Akamai is suing on claims of patent infringement. Sagan and team will have to fight for every dollar of profit.

Expect them to win more than their shares of scuffles. They've seen competitors come and go before, and they're as battle-tested a bunch as you'll find.

Do you agree? Disagree? Let us know what you think about Akamai's opportunity here and abroad using the comments box below. You can also rate Akamai Technologies in Motley Fool CAPS.

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

Akamai and Google are Motley Fool Rule Breakers recommendations. Google is 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 and Google 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 don't 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 and its disclosure policy is managing just fine, thanks.


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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 March 01, 2011, at 5:32 AM, spinnerrobert wrote:

    Its too much dips since $54? Its 37 now. People lose 45% of their investment in 2 weeks. Will this go back up? When?

  • Report this Comment On March 01, 2011, at 1:52 PM, hbrown19 wrote:

    People haven't lost anything if they haven't sold. If AKAM is a good long term investment (which I believe it is) then this is the opportune time to accumulate shares and reduce your cost basis (which I did).

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