Is Akamai Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Akamai (AKAM 0.42%) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Akamai's story, and we'll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's look at Akamai's key statistics:

AKAM Revenue (TTM) data by YCharts

Source: YCharts.
*Period begins at end of Q3 2010.

AKAM Return on Equity (TTM) data by YCharts

Source: YCharts.
*Period begins at end of Q3 2010.

How we got here and where we're going
Akamai puts together a really impressive performance in its second assessment, scoring six out of seven possible passing grades compared to only three passing grades last year. The only failing grade occurred because Akamai's free cash flow has failed to keep pace with soaring net income -- but these two metrics are neck and neck on a nominal basis for the trailing 12 months, so Akamai has a healthy bottom line in more than one way. In all other areas, Akamai has enjoyed strong growth, which has turned it from a middling stock into what appears to be a great investment. But can Akamai keep up its progress, or is this going to be the company's high-water mark? Let's dig deeper to see what the future might hold.

Recently, Akamai's shares tumbled by as much as 12% despite solid growth in both revenue and earnings for the third quarter, thanks to weak forward guidance. The company has been in negotiations with its largest media customer, which has typically been thought to be Netflix (NFLX -3.92%), purveyor of more content than any other one site on the Internet. Fool contributor Dan Caplinger points out that higher levels of high-quality video streaming activity have been a key driver of Akamai's overall traffic. Any deterioration in Akamai's relationship with Netflix would undoubtedly undermine its growth, as there really is no comparable content company out there at the moment.

Customers have thus far shown a great deal of interest in utilizing Akamai's network, and its Kona Site Defender, which adds an extra layer of network security. Networking giant Cisco Systems (CSCO 0.06%) recently signed a deal to use Akamai's software in its high-end routers, which is an important placement as Akamai seeks to push its high-value software applications into the enterprise environment. Akamai is also set to gain immediate benefits from the acquisition of Israeli start-up Cotendo, which had signed a four-year online content delivery deal with AT&T.

Limelight Networks and Level 3 Communications continue to battle Akamai in the content delivery segment, which has understandably led to pricing wars as the three companies try to grab at the same customer base. Amazon.com is also contemplating a one-stop turnkey solution to its cloud-services clients, which could pose an emerging threat to Akamai and its peers should it be paired with content delivery services. Fool contributor Tim Beyers notes that Google's Project Shield, which offers similar protection as Akamai's Kona Site Defender, could be a game changer in the network security space.

Putting the pieces together
Today, Akamai has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.