A few months ago, I sold a long-held position in Akamai Technologies
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:
|
Metric |
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
Analysts expect Akamai's other best-known peer, Limelight Networks
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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