This Just In: Upgrades for Akamai

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.

And speaking of the best ...
A choppy, post-T-Day week ended on an up-note Friday, as markets glowed faintly green -- and above the sea of relieved sighs, actual cheering could be heard from at least a few investors. Who were these happy souls?

Shareholders of Akamai (NASDAQ:AKAM), which jumped over 5% Friday. And what was the reason for their elation?

That, Fools, is the heart of today's story.

Two cheers for Akamai!
Not one, but two separate analysts issued upgrades for this content delivery facilitator Friday. "Analyst A" cited an evident resurgence in e-commerce, and predicted an imminent recovery in online ad spending in 2010 and, farther out, the emergence of hi-def Internet video as a revenue driver over the next 18 to 24 months. "Analyst B" likewise saw an "improving outlook" for Internet media, entertainment, and e-commerce sites, and furthermore praised Akamai's strong balance sheet and free cash flow.

Now here's the bad news: These two mystery analysts were Citigroup and Oppenheimer.

Let's go to the tape
Why is that "bad news?" Well, consider their records. Citigroup ranks in the bottom third of investors tracked by CAPS, scoring a bare 50% record for the accuracy of its picks. Oppenheimer's rep is slightly worse: ranked in the 40th percentile of CAPS investors overall, fewer than half of Oppenheimer's recommendations beat the market.

And now for the worst part: Within the specific niche of Internet Software and Service providers that Akamai inhabits, both Citigroup and Oppenheimer are doing even worse than their overall records would suggest. Oppenheimer's active ISS picks include such losers as:

While Citigroup's gaffes include:

All of which argues against taking either analyst's advice on anything Internet-related -- Akamai included.

And yet ...
And yet I have to admit, their records notwithstanding, I find it hard to fault the analysts' logic on why Akamai might in fact be a buy. Citi, for example, argues that Wall Street's expectation of just 1% earnings growth out of Akamai next year may be conservative. Akamai does a lot of business facilitating "online advertising and online sales," you see, and according to Citi, both these markets are expected to grow in the double-digits in 2010. This being the case, it's unlikely that "two of Akamai's biggest end markets can grow in the double digits in '10," yet Akamai itself would remain basically flatlined at 1%.

Similar thinking has Oppenheimer predicting 7% revenue growth for Akamai next year. Oppy further emphasizes the fact that Akamai gets about half of its revenues from "value-added services."

Foolish takeaway
Now don't get me wrong: Akamai bears have good reason to discount last week's upgrades -- bad analysts tend to make bad guesses, after all. And with Akamai shares selling for more than 13 times free cash flow, and a whopping 31 times trailing earnings, there's not a whole lot of room for error at these prices. (So it's little wonder that investors have sold short more than 15% of Akamai's shares.)

Still, it's worth considering what might happen if the analysts are right about the growth in Internet traffic next year and, even more so, about the added services Akamai is offering. Faster-than-expected growth in either (or both!) could make consensus projections for Akamai look conservative in a hurry. In which case, investors might be wanting to own, rather than short, Akamai's shares.

Personally, I don't know that this will happen, and at these prices, I'm not willing to bet that it will. I do know one thing, though: If it does happen, I don't want to be the guy standing in front of the stampede.