Sunday, March 2, 2008

Akamai (AKAM) Douses Limelight

Akamai (AKAM) has always been a good technology company, centered around a good idea: the accelerated delivery of Internet pages. Large companies who are selling goods on the Internet don't want to lose sales, or advertising revenue, due to Internet congestion.

For a long time I believed Akamai was overvalued. It was sky-high during the Internet boom of 1999 when it had little revenue. After the bust you could buy it for $2 per share, and it was still growing, but far from being profitable. By 2007 it had everything you could want in a company: rapid growth, with profits growing more rapidly than revenues. But investors who were burned in 2000 were reluctant to plunge back in. The stock did not become cheap until the threat of competition combined with the housing-mortgage-market induced liquidity sqeeze brought it down into the $30 per share range in the second half of 2007. After watching the stock for years, and covering its quarterly analyst conferences (see my Akamai page for links to summaries), I bought Akamai on January 2nd, 2008. I still consider Akamai to be a risky stock, and I was buying at a risky time given macroeconomics, but it appears the level of risk plunged this Friday.

According to Akamai's press release, it won its patent litigation with Limelight Networks. "The jury awarded Akamai $45,526,946 in damages, plus interest." I caution readers that this was a Federal District Court level decision; such decisions are almost always appealed. Even if the decision is not reversed, the award could be lowered, and Akamai will not see the money any time soon.

However, it shows the benefit of being an early leader in a field and patenting your innovations. This decision will certainly make other companies think twice before going into competition with Akamai.

In the short run it does not change how much revenue or profit Akamai will generate this quarter or in 2008. It just adds some color to the argument that Akamai stock is underpriced given its strong record of growth. If you use the NASDAQ AKAM page, they give the trailing price to earnings (PE) ratio as 26.4 and forward PE as 17.3 (these are non-GAAP numbers). And that is after the 5% one-day price bump from the patent litigation news.

Keep in mind that all stocks are subject to unforeseen risks. Keep diversified.

See the list of stocks I follow

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