A few months ago, I sold a long-held position in Akamai Technologies (Nasdaq: AKAM) at $22.57 a share. Had I held, I'd be sitting on a 69% gain as of this writing. Ouch.

Timing mistakes are inevitable in the great game of investing, and I clearly made one in selling Akamai too soon after buying too late. Good thing my strategy doesn't depend on high rates of accuracy.

As you might imagine, I've already received mail asking whether I'd reconsider my sell thesis in the wake of Akamai's strong fourth-quarter results. I promise a full and honest answer by the end of this article, but let's dig into the numbers first:


Q4 2011

Q4 2010

Year-Over-Year Growth

Revenue $323.7 million $284.7 million 13.7%
Normalized profit per share $0.45 $0.40 12.5%
Gross margin 68.3% 74.9% (6.6 points)
Return on capital 9.8% 10.2% (0.4 points)
Return on equity 11.2% 10% 1.2 points
Free cash flow $89.3 million $70.7 million 26.3%
FCF as a % of revenue 27.6% 24.8% 2.8 points
Cash / debt $849.2 million/ $0 $606.6 million / $0 39.9%

Source: S&P Capital IQ.

Impressive, right? I'd say so. Not only did Akamai beat the average Q4 earnings estimate by $0.05 a share, but the leading content delivery network grew free cash flow at nearly double the rate of revenue and materially strengthened its balance sheet.

Of the metrics that matter most, only gross margin and return on capital fell, while return on equity improved modestly. Price cuts are obviously taking a toll in some areas, yet Akamai continues to produce prodigious cash flows despite pressure from competitors.

Less trouble on the horizon
Among rivals, Level 3 Communications (Nasdaq: LVLT) seems to be doing best. The company, which operates a global fiber-optic network for transmitting data over the Internet, saw revenue increase 75% and free cash flow improve 24% in the fourth quarter, as consumers and businesses alike show more interest in using the Web for on-demand video.

Analysts expect Akamai's other best-known peer, Limelight Networks (Nasdaq: LLNW), to suffer a $0.02 per share loss on an 18% decline in revenue when it reports fourth-quarter results next week. Not exactly fear-inspiring. Meanwhile, Akamai has eliminated a high-profile threat in Cotendo, which it expects to acquire for $268 million, and added to its portfolio of acceleration technologies by acquiring Blaze Technologies for an undisclosed sum.

As CEO Paul Sagan described it in an interview this week, the deals help Akamai execute a strategy of accelerating content wherever it may travel, worldwide, on any type of device, whether computer, TV, smartphone, tablet, etc. Goals don't come much more audacious than that.

Answering the BIG question
So is Akamai a buy? There's a lot to like about last quarter's results, but guidance doesn't bespeak of the sort of growth I'd typically attach to Sagan's Big Ideas.

His team expects to 11% to 13% revenue growth in the first quarter, excluding any impact from the still-pending Cotendo deal. Profits, meanwhile, are projected to come in between $0.36 and $0.39 a share -- little or no growth when compared with last year's first quarter.

History doesn't help the picture much. Akamai has beaten estimates by 3% or less in two of the last four quarters, and missed by 3% in last year's Q2. This week's blowout performance is an aberration when viewed through a dispassionate lens.

So while I like Akamai more today than I did a few months ago, eroding margins are still a problem, returns on capital aren't rising, and outsized growth hasn't returned. This is a good business, to be sure, and I'm very happy for those who've held and enjoyed market-crushing gains since the summer. What's missing is any evidence of Akamai acting like the Rule Breaker it once was.

At best -- and I hope this is the case -- it's a Tweener on the way to becoming a Rule Maker. Do you agree? Disagree? Either way, it makes sense to study how the Internet has changed computing. The Motley Fool recently dug into this trend in a video research brief entitled "Two Words Bill Gates Doesn't Want You to Hear." the report is free but only for a limited time, so click here to watch now.

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