Fool on the Street: Akamai Access

Last month, Web content delivery maven Akamai Technologies (Nasdaq: AKAM  ) held its first analyst conference since the Internet bubble popped. At the time, its stock had tripled from our original recommendation in Motley Fool Rule Breakers. Not even a month later, it's now up another 100%, making Akamai the first four-bagger for David Gardner's growth-stock service.

Catching a $1 billion wave
What gives? Blame optimistic comments. CEO Paul Sagan, who's been at the firm since its earliest days, told attendees that Akamai is aiming for rarified air. "There are thousands of software companies in the world," he said. "I think the number is 15 today that have $1 billion in revenue. That's the club we're going for."

Frankly, I've no idea whether Sagan's count is correct. But he's right in saying that the list isn't large. Microsoft (Nasdaq: MSFT  ) , Oracle (Nasdaq: ORCL  ) , and SAP (NYSE: SAP  ) have few peers. And up-and-comers such as Red Hat (Nasdaq: RHAT  ) and Salesforce.com (NYSE: CRM  ) have yet to break $400 million in sales.

Broadband, dude, broadband
Akamai is there, too, but its recent sales growth has approached 50%. Some of that surely owes to its early-2005 acquisition of Speedera. More, however, can be attributed to an explosion of growth in broadband, and fundamental changes in how businesses approach the online channel as a revenue-driver, according to Sagan.

For example, Sagan said there are more than 100 million broadband connections in existence today. Yet that's a fraction of the more than 1 billion people now on the Internet. Surely the math isn't so simple as dividing 100 million by 1 billion. Yet it's virtually certain that no more than 10% of the world's Web users are connected via broadband.

Meanwhile, fast connections have enabled online businesses. Sagan cited one case where a single Akamai customer had seen $31 million in incremental revenue growth from the online channel. Another, which Sagan called "one of the largest big-box retailers," has grown its online operations to account for a third of its revenue. Such demand drives the need to invest in performance, which, in turn, creates interest for Akamai's services.

Riding on the edge
Akamai's advantage is the pervasiveness of its global network, argued co-founder and chief scientist Tom Leighton. How pervasive? Akamai today delivers content for more than 2,000 customers from 20,000 servers in 2,800 locations in 660 cities in 70 countries.

If that sounds impressive, it is. But it's also necessary, says Leighton, because Akamai servers need to be geographically close to users to do their jobs. I'll spare you the technical details, but in essence, Leighton explained that Akamai's software tends to be predictive in pulling data from an origin site. As such, it reduces the number of data requests that flow over the Internet -- so much so, says Leighton, that it's common for less than 10% of a site's content to be obtained from the origin server when Akamai acts as an intermediary.

Naturally, keeping much-used content at the edge, where users live, improves performance. Sometimes, it's by an order of magnitude or more. Chris Schoettle, Akamai's executive vice president of technology, told attendees that Akamai's network frequently outperforms those of rivals by a factor of 2.5.

Certainly, that sounds incredibly impressive. But is it really true? I've no reason to doubt the math, but it's at least worth remembering that Akamai is suing privately held competitor Limelight Networks, which has gained notoriety and funding for serving major online media outlets such as YouTube.

One beach, four babes
Of course, Akamai is no slouch when it comes to media and entertainment. Apple's (Nasdaq: AAPL  ) iTunes service is a customer, for example. And Microsoft, a big customer in software downloads -- Akamai's network has delivered millions of beta copies of the Vista operating system -- seems likely to turn to Akamai when its Zune service goes live.

No wonder media is Akamai's largest segment, accounting for 38% of revenue, according to chief financial officer J.D. Sherman. But there's more to Akamai than media. Software downloads, commerce, and the public sector remain notable verticals, particularly the latter. Since 2002, when the company first organized a sales force to mine particular industries, Akamai's public-sector business has grown dramatically; it now serves 14 of 15 cabinet agencies and all three branches of the military.

Wax on, young (Web) surfer
And that's merely the crest of the wave. Review the presentations, and you'll see that Akamai has several successful customer deployments to back up the business case for its service. But even a bullish shareholder like me gets nervous when a growth stock moves as far as Akamai has in so short a time.

Nonetheless, the buying may be justified. Consider some back-of-the-napkin math. Analysts believe that Akamai will finish 2006 with $418 million in sales. Boosting that total to $1 billion before the end of the decade, as Sagan and his team aim to do, requires roughly 35% growth over the next three years.

What about the bottom line? It's been growing faster than the top line. But let's keep this exercise simple and apply the same growth rate there, too. That results in $2.06 in normalized net income per stub in three years. Mix in a multiple of 30 -- not at all unreasonable, given Akamai's extraordinary growth and the multibillion-dollar opportunity that Web-based digital distribution appears poised to become -- and Akamai could trade for $62 at the dawn of 2010.

So if Akamai's managers seem overly bullish, forgive them. They've had a great run over the past year, and there's no sign of the good times ending soon. Wax on, dude.

Keep your ear to the Street with other reports in this series:

Akamaiis aMotley Fool Rule Breakersrecommendation. If you're in the market for other great growth-stock opportunities like Akamai, take a free 30-day trial of the Motley Fool Rule Breakers newsletter service. You'll get access to all the picks, the research behind each, and a vibrant community of fellow future-focused Fools, free for 30 days.

Fool contributor Tim Beyers owns LEAP options in Apple and shares of Oracle and Akamai, which, along with XM, is a Motley Fool Rule Breakers selection. Microsoft is aMotley Fool Inside Valuepick. Get the skinny on all of the stocks in Tim's portfolio by checking his Fool profile. The Motley Fool's disclosure policy always walks on the right side of the street.


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