The Unimportant Story of Akamai [Fool Plate Special] April 25, 2000

An Investment Opinion

The Unimportant Story of Akamai

By Brian Lund (TMF Tardior)
April 25, 2000

There are two stories at Akamai Technologies (Nasdaq: AKAM), an Internet content and applications delivery company. One has to do with an IPO, analysts' expectations, lockouts, greed and fear. The other is about a company providing an essential solution (a word that's been hackneyed to death, but that actually applies in this case) for a vital, burgeoning industry. Mr. Market just can't seem to decide which is more important.

Let's get the first one out of the way. Akamai had one of those manic IPOs that the bears assure us can only end in destruction. The IPO price on October 29 was $26, but you couldn't have bought it before $110. It closed at $145. That's almost exactly twice what Akamai was trading for at the close yesterday, when it fell 13% ahead of its first-quarter earnings report.

Did someone know that there would be bad news in the earnings? Lots of news wires apparently thought so. They latched on to the reported loss per share of $0.47, which appeared to the uninitiated to have fallen short of the $0.40 per share analysts that polled by First Call had expected.

See, the problem was that Akamai didn't make clear in their press release that one needs to discount goodwill amortization and equity-related compensation costs to get to the number the analysts were looking for. It's a new company. It doesn't quite get the game yet. It had to issue a follow-up press release explaining that Akamai had actually beat estimates by $0.08.

Still, the anticipated earnings number probably wasn't behind the stock's 75% fall in the last six weeks. Part of the reason for that drop is that infrastructure is out. Another part is that the 180-day lockup period for shares held by management, the board of directors, and venture capitalists (VCs) that funded the company was due to expire today. With a float of 9 million shares, the prospect of the 74+ million that these folks own suddenly coming into play seemed more than a little scary.

Akamai's management proved hip to this bugaboo, however. They said in their conference call that insiders and the principal VCs had committed to another lockup running through the end of the current second quarter. That's 57 million shares that won't go anywhere. Of the 17.3 million other shares owned by angel investors, 2.3 million were released from lockup last week, while the other 15 million have been relocked until mid-summer.

Now that the pointless crap is out of the way, let's talk about the real story at Akamai. It has run up its signed customer rolls from 227 last quarter to 425. That's almost nine times more than the 49 customers it had signed up at the IPO (an elite cadre that included Yahoo! (Nasdaq: YHOO), Disney (NYSE: DIS) and The Motley Fool). Revenue has increased eightfold since October to $7.2 million, well ahead of the $5.5-6 million analysts expected. In fact, every metric the company uses came in ahead of expectations.

What do those expectations mean, when the company is trading at 650 times trailing 12-month sales? Quite a lot, since expectations for Akamai are very high. The company has dominated its industry, which manages Internet traffic to optimize performance levels at its clients' websites. The sector is predicted to become worth $44 billion in 2004. It's not hard to model Internet traffic levels and Akamai's share of that market in order to produce a pretty lofty present value from future cash flows. Akamai's first-quarter earnings showed that the company is ahead of schedule.

Ten years from now, if the second story plays out, the first story won't be worth the bandwidth I've spent on it.

Related Links:

  • Akamai Discussion Board
  • Akamai home page