Hey, Foolish folks! Last Thursday I began breaking down Akamai Technologies (Nasdaq: AKAM) by looking at the content-delivery industry and Akamai's leading position in it. I concluded that, while competition from upstarts exists and will continue, it is not a big threat, and that it seems big players don't want to compete with Akamai. Now we move to Rule Breaker criteria number two:
Sustainable advantage gained through business momentum, patent protection, visionary leadership, or inept competitors.
Why don't big players want to compete with Akamai? Two main reasons: Akamai's proprietary technology and its strong business momentum.
Akamai, as a company, is a result of its technology, not vice versa. In 1995, professors and graduate students in mathematics, computer science, and electrical engineering at MIT got together to improve the performance of high-volume servers. They created a set of algorithms that optimize servers based on the location of the user and server workload. This technology, or "secret sauce" as Akamai calls it, is the foundation of Akamai's appeal.
The company has even gone a step further. It has become obsessed with effective sales and customer service. You can hear the devotion to its customers in any conference call with management. Here at the Fool, our techies praise Akamai for its commitment to optimize the service, to make the transition to "Akamaized" content smooth, and to respond honestly to any complaints customers have.
You can see evidence of this commitment on our boards. When a Foolish poster noted that our Akamaized content was slow, an Akamai representative herself posted a response.
It's through this kind of service that Akamai retains its customers, expands its user base, and maintains the business momentum that it created by being the first mover. Onto our next criteria.
Excellent past share price appreciation, measured by a relative strength of 90 or higher.
True, if you look in Investor's Business Daily, you'll read that Akamai's relative strength is eight. That's a sight short of 90.
Let's look at it a little differently, though. Akamai had its initial public offering (IPO) on October 28, 1999, and began trading on October 29. The IPO price was $26 per share, but it opened on the 29th at $110 and closed over $145. IBD uses the first-day closing price as the basis of its relative strength calculation, so it sees Akamai as 50% off its year-ago price.
However, if you consider the IPO price as the basis for the comparison (and surely that number is much closer to the value the company had to venture capital investors a year ago), you find that Akamai is up somewhere in the neighborhood of 180%. That would put its relative strength near 95.
That's my argument, anyway. We each need to decide how much merit it has.
Our next Rule Breaker criterion is...
Good management and smart backing.
Though academics founded Akamai, the company has attracted strong management. George Conrades, former executive vice president of GTE and head of IBM North America, is Akamai's chairman and CEO. Its president, Paul Sagan, was president of Time Inc. New Media, where he was one of the founders of broadband Internet provider Road Runner.
Akamai has also collected investments from big-name partners:
- In April 1999, Apple Computer (Nasdaq: AAPL) invested in Akamai to accelerate the rollout of its service in exchange for 3% of the company.
- Cisco Systems (Nasdaq: CSCO) signed on in August 1999 to develop content-based routing and switching technologies within Cisco's infrastructure. The companies also agreed to cross-promote each other's services. Cisco also took a 3% stake in Akamai.
- Microsoft (Nasdaq: MSFT) bought 1% of Akamai in September 1999. It agreed to integrate Microsoft's streaming media applications into Akamai's service and to enhance compatibility with Windows Server operating system.
The stronger the consumer brand, the better.
Akamai has yet to establish a strong consumer brand among Internet users, but it has developed quite a strong reputation with Internet companies. Our techies rave about the company, and Yahoo!'s (Nasdaq: YHOO) chief technical officer also admires it.
Akamai has focused very strongly on branding since its origin. The company advertises in tech magazines and on NPR. It has added "Akamaized" to the lexicon of Web development, and would like to add it to the general public's vocabulary as well (a la "Intel Inside"). Once Akamai establishes that "Akamaized" content works better, I think that we will see the brand name move into the public consciousness.
A significant constituent of the financial media has recently called the company overvalued.
Put the words "Akamai" and "overvalued" into Google and you'll get a long list of links. Even after Akamai fell 80% from its high, The Internet Analyst said, "We think Akamai is still overvalued." The 'zine noted that Akamai has already signed up most of the major players as customers and that it faces stronger competition from Digital Island (Nasdaq: ISLD). Some others:
- Hoodwinked.com thinks that the cost of bandwidth will "drop like a stone," leaving Akamai without a raison d'ï¿½tre.
- Fallingshort.com considered revised estimates of Akamai's time-to-profitability as evidence of overvaluation.
- Worth.com questioned the validity of using nontraditional metrics to evaluate companies like Akamai.
That's my case for Akamai. As I said in part one, I am a shareholder, as are many other folks at Fool HQ, mainly techies. I own it because I think that it has a bright future, especially once graphics and streaming video become a major component of the Internet experience. I do think this company is a Rule Breaker.
Thank you for the great thoughts and discussion of Akamai following Thursday's column. Once again we invite you to visit the Rule Breaker Companies discussion board and let us know: What key issues did we miss? Are we too optimistic? Do you believe that Akamai is a Rule Breaker? Share your thoughts and check out what other Fools have to say.
-- Brian Lund, TMF Tardior to the cops in Cairo (suckers!).