My latest Seeking Alpha post:
Akamai: Q4 Could Be A Catalyst
I like Akamai, but for my own portfolio that I try to keep to less than 20 stocks, to get back in it has to compete with a lot of stocks I study on a regular basis. If I already owned it I would be holding it. The last time I had some I sold it on May 16, 2013 for $48.05 per share, having bought it in August 2011 for $24.78 per share. Akamai has been growing revenue, and usually profits, since its inception, and I expect that to continue. The question, even for a good company with growing profits, is how much is that worth. I think Akamai is priced right, but given I am trying to shift more money to small cap biotechnology stocks, I would probably need to see a retreat to around $40 per share to induce me to buy. AKAM closed today at $47.62, up $0.94, giving it a market capitalization of $8.5 billion and a P/E Ratio of 30.7.
You can see my historic notes and analysis at Akamai Analyst notes.
Showing posts with label AKAM. Show all posts
Showing posts with label AKAM. Show all posts
Thursday, January 9, 2014
Wednesday, August 7, 2013
Microchip (MCHP), Akamai (AKAM), SGI, and Hansen Medical (HNSN)
Earnings season is in full swing to me, as small and mid-cap firms that I follow report.
Today the editors at Seeking Alpha accepted and posted these articles I wrote:
Akamai Remains Volatile, So Buy on Dips
Microchip for Solid Growth and Dividends
I also posted my notes on the analyst conferences:
SGI June quarter 2013 analyst call
Hansen Medical (HNSN) June quarter 2013 analyst call
Neither SGI nor HNSN were very inspiring, which I'll explain when I have time to write articles on them, though it is pretty obvious from the June quarter results.
As I write this I own Microchip (MCHP), Silicon Graphics International (SGI) and Hansen Medical (HNSN) stock, but not Akamai (AKAM).
Today the editors at Seeking Alpha accepted and posted these articles I wrote:
Akamai Remains Volatile, So Buy on Dips
Microchip for Solid Growth and Dividends
I also posted my notes on the analyst conferences:
SGI June quarter 2013 analyst call
Hansen Medical (HNSN) June quarter 2013 analyst call
Neither SGI nor HNSN were very inspiring, which I'll explain when I have time to write articles on them, though it is pretty obvious from the June quarter results.
As I write this I own Microchip (MCHP), Silicon Graphics International (SGI) and Hansen Medical (HNSN) stock, but not Akamai (AKAM).
Tuesday, March 12, 2013
Akamai (AKAM) 2013 Outlook Bright
"Some experts mutter dark warnings about the Spamularity: the global Chaos
that will ensue once the first distributed spamming engine achieves
human-equivalent sentience."—Rule 34
by Charles Stross
that will ensue once the first distributed spamming engine achieves
human-equivalent sentience."—Rule 34
by Charles Stross Content acceleration has always been important to AKAM, but for years it has been adding other services to its repertoire. Content acceleration is a volume-driven, price sensitive business, with a record of constant declining y/y prices, much like mass-market semiconductors. Akamai's new services, notably Internet security, are also competitive, but have offered much better profit margins that should hold up at least in the near term.
So why is AKAM priced today around $34.71, well off its 52 week high of $42.52 on January 1, if well above its 52 week low of $24.90 on June 5, 2012? In the past AKAM was a playground for momentum players; it was a relatively small company, and you might see PE ratios swing wildly between say 20 and 60. Lately the stock is behaving more like IBM, more stable, with a much smaller but still impressive market cap of $6.2 billion. At the price quoted above the PE is 31.1 trailing, which is higher than most tech stocks at the moment, but easily justified by a history of growth and the outlook for 2013.
For the latest reported quarter, Q4 2012 ending December 31, Revenue was $377.9 million, up 9% sequentially from $345.3 million and up 17% from $323.7 million in the year-earlier quarter. GAAP net income was $68.3 million, up 42% sequentially from $48.2 million and up 14% from $60.1 million year-earlier.
Akamai just re-issued guidance for Q1, which this late in the quarter should be pretty reliable. Revenue is expected between $352 and $362 million. On a sequential basis that may seem disappointing, but keep in mind that Akamai gets a yearly Q4 bump from the increase in e-commerce in the quarter. Compared to year-earlier revenue of $319.4 million, we get an annual growth rate of 10% at the low end and 13% at the high end.
The dynamics of the business appear to be favoring Akamai. Cloud infrastructure revenue, rather than content acceleration, was 60% of total revenue in Q4. The security component of that was up 5x from the previous year. A major rival, AT&T, has thrown in the towel and is becoming a reseller of Akamai services, which should add substantially to revenue in the second half.
Even the underlying trend for the content acceleration business shows no sign of ebbing. Akamai was founded in 1998. It is just 15 years old. Humans in that age bracket are in an always-connected culture dominated by video and cloud services that often require data packets to be sent from a vast assortment of geographically diverse server farms. The amount of data being served will continue to increase, and Akamai essentially runs a private toll road system within the Internet for those who want the fast service that is essential to capturing customers and converting views to sales.
I like Akamai at this price. I expect it will blow through its current 52-week high some time this year as revenue and profits from the relatively new cloud security business and other new value-added cloud services ramp.
Disclaimer: I am long Akamai. I will not trade the stock for 1 week following this post.
See also: Akamai Investor Relations
My main AKAMAI analyst conferences page.
My conference notes for the Akamai Q4 2012 analyst conference
Saturday, August 25, 2012
Akamai Price Justified?
Akamai (AKAM) has made and lost investors and speculators vast sums of money over the years, going back to the original Internet bubble of the late 1990s. Yesterday the stock closed at $37.10, giving it a market capitalization near $6.58 billion. It had a trailing Price to Earnings (P/E) ratio just over 35 (per NASDAQ), considerably higher than most technology stocks currently. That indicates either that investors expect substantial profit growth in the future, or that speculators have bought into momentum and are ready to get out quickly if the momentum turns. Or both.
Akamai's core technology accelerates the delivery of Web pages and media. This is critical to e-commerce sites, where people may go elsewhere or fail to make a purchase if a page downloads slowly. It is also crucial to video and audio playing without stuttering. Building on that, Akamai offers its enterprise partners other key Internet cloud technologies, notably security.
Look at the quarter results and analyst conference of July 25 and you will see that Revenue was $331.3 million, up 4% sequentially from $319.4 million and up 20% from $277.0 million year-earlier. But GAAP net income was $44.2 million, down 8% from $47.9 million year-earlier. GAAP EPS (earnings per share) were $0.24, were down 4% from $0.25 year-earlier.
So GAAP profits did not climb y/y the way you would expect a company with a P/E of 35. Akamai reported non-GAAP "normalized net income" of $78 million or $0.43 per share, up 3% sequentially and 23% y/y. EBITDA was $143 million, flat sequentially and up 13% from year-earlier. Cash flow from operations was $150 million. $67 million was spent in the quarter to repurchase stock. Capital expenditures were $56 million.
Clearly Akamai bulls are looking at revenue growth and cash flow growth, rather than GAAP numbers. Akamai has a rather high non-cash stock-based compensation expense, $25.6 million in the quarter, and depreciation and amortization, $50.1 million in the quarter. That accounts for most of the difference between the grim GAAP profit lack of growth and the outstanding non-GAAP growth rates.
Revenues and profits depend primarily on the dynamics between Internet data growth and drops in pricing. According the Akamai, pricing drops are not primarily due to competition, although Akamai has competitors who are forced to compete on price. Rather Akamai drops prices on a regular basis to encourage data growth. In the long run this helps its customers and yet grows Akamai profits. There is no sign that the amount of data sent over the Internet will stall anytime soon as the use of mobile devices and video expand. There is also an ongoing expansion of the customer base to lower-income users around the world.
Guidance for Q3 is for increased income and a slight contraction in non-GAAP EPS. Internet traffic is seasonal, with lows during summers, but a lot of people used the Internet to watch the Olympics. The better guide to Akamai performance is growth over periods of a year or longer.
For most investors AKAM has probably reached the point where the high P/E is getting hard to justify, given the other choices in the market. I originally bought AKAM during a slump when it was clearly undervalued, and because of its volatility I have traded in and out more than I like (I am a buy and hold guy). Given Internet trends, and Akamai's move into security and other cloud services, I think over the longer run Akamai will become considerably more profitable, but there is some P/E height at which I would dump the stock. Then again, if the P/E dropped below 25, I would be a buyer again.
Since I've made a deal out of P/E ratios as buy and sell signals, I should note that you can get different P/Es by looking at GAAP vs. non-GAAP and different time spans. As a check, note the non-GAAP EPS for Q2 was $0.43. A year's EPS at that rate would be $1.72. Divide into $37.10 and you get a P/E of 21.6. Which is a much safer sounding number than NASDAQ's trailing P/E calculation of 35. On the other hand the GAAP current P/E would be $37.10 / 4 x $0.24, or 38.6, which sounds much more pricey. You might want to think deeply about Akamai's reasons for reporting non-GAAP numbers before you trade this stock.
Disclaimer: I am long AKAM and won't trade in it for 5 days after this article is originally published.
Akamai's core technology accelerates the delivery of Web pages and media. This is critical to e-commerce sites, where people may go elsewhere or fail to make a purchase if a page downloads slowly. It is also crucial to video and audio playing without stuttering. Building on that, Akamai offers its enterprise partners other key Internet cloud technologies, notably security.
Look at the quarter results and analyst conference of July 25 and you will see that Revenue was $331.3 million, up 4% sequentially from $319.4 million and up 20% from $277.0 million year-earlier. But GAAP net income was $44.2 million, down 8% from $47.9 million year-earlier. GAAP EPS (earnings per share) were $0.24, were down 4% from $0.25 year-earlier.
So GAAP profits did not climb y/y the way you would expect a company with a P/E of 35. Akamai reported non-GAAP "normalized net income" of $78 million or $0.43 per share, up 3% sequentially and 23% y/y. EBITDA was $143 million, flat sequentially and up 13% from year-earlier. Cash flow from operations was $150 million. $67 million was spent in the quarter to repurchase stock. Capital expenditures were $56 million.
Clearly Akamai bulls are looking at revenue growth and cash flow growth, rather than GAAP numbers. Akamai has a rather high non-cash stock-based compensation expense, $25.6 million in the quarter, and depreciation and amortization, $50.1 million in the quarter. That accounts for most of the difference between the grim GAAP profit lack of growth and the outstanding non-GAAP growth rates.
Revenues and profits depend primarily on the dynamics between Internet data growth and drops in pricing. According the Akamai, pricing drops are not primarily due to competition, although Akamai has competitors who are forced to compete on price. Rather Akamai drops prices on a regular basis to encourage data growth. In the long run this helps its customers and yet grows Akamai profits. There is no sign that the amount of data sent over the Internet will stall anytime soon as the use of mobile devices and video expand. There is also an ongoing expansion of the customer base to lower-income users around the world.
Guidance for Q3 is for increased income and a slight contraction in non-GAAP EPS. Internet traffic is seasonal, with lows during summers, but a lot of people used the Internet to watch the Olympics. The better guide to Akamai performance is growth over periods of a year or longer.
For most investors AKAM has probably reached the point where the high P/E is getting hard to justify, given the other choices in the market. I originally bought AKAM during a slump when it was clearly undervalued, and because of its volatility I have traded in and out more than I like (I am a buy and hold guy). Given Internet trends, and Akamai's move into security and other cloud services, I think over the longer run Akamai will become considerably more profitable, but there is some P/E height at which I would dump the stock. Then again, if the P/E dropped below 25, I would be a buyer again.
Since I've made a deal out of P/E ratios as buy and sell signals, I should note that you can get different P/Es by looking at GAAP vs. non-GAAP and different time spans. As a check, note the non-GAAP EPS for Q2 was $0.43. A year's EPS at that rate would be $1.72. Divide into $37.10 and you get a P/E of 21.6. Which is a much safer sounding number than NASDAQ's trailing P/E calculation of 35. On the other hand the GAAP current P/E would be $37.10 / 4 x $0.24, or 38.6, which sounds much more pricey. You might want to think deeply about Akamai's reasons for reporting non-GAAP numbers before you trade this stock.
Disclaimer: I am long AKAM and won't trade in it for 5 days after this article is originally published.
Tuesday, November 1, 2011
Akamai Grows with Internet
Akamai Technologies' (AKAM) stock price is $26.43 as I write. Before (Wednesday, October 26, 2011) Akamai's Q3 results announcement and analyst conference call the price ended at $23.77, and its peak the last few days was $28.28 on Friday. Clearly the results and outlooks pleased more traders than they displeased. What can we learn from the results and conference call?
Akamai is best known from the dot.com boom bust era, when it soared in price before it started showing profits. During the last decade its earnings have grown pretty steadily on a year to year basis. Its stock price and P/E ratio has been pretty well-aligned with reality. Today the trailing 12 month P/E is 26. Non-GAAP earnings for Q3 were up 10% y/y, and revenues were up 11%. The P/E is a bit high for this market, but the almost the entire market is undervalued due to fear still triumphing over greed.
Akamai's core business is content delivery, speeding up web page and file delivery from originators to consumers. Increasingly its income and profits are derived from "value-added" businesses, including security for cloud datacenters and DSA (dynamic site acceleration). It is also involved in accelerating the delivery of content to mobile devices.
As the amount of data delivered by the Internet, including cellular networks, grows, so does Akamai, presuming it maintains its large market share in the business. But prices also drop on a per unit basis as volume goes up. Akamai management believes that the delivery of video content is going to drive up volume, revenue and profits. While video data delivery is growing rapidly, it has not yet started to accelerate at rates that would compensate for Akamai's aggressive pricing to its clients.
There is always concern about competition, but mostly competitors have had to compete on price to win customers, making their profit margins thin or non-existent.
Akamai has $1.2 billion in cash and equivalents and generated $116 million in cash flow from operations in the quarter. They invested $47 million in capital expenditures. It is hard to compete with that, as I wrote in Akamai or Limelight? in January of this year.
At this price I am holding my Akamai stock, believing that downside risks are mainly market risks while upside potential is present from both increased video delivery and broader adoption of Akamai's cloud services solutions. Another bright spot is international revenue, which grew 15% y/y. Akamai started in the U.S. and is still expanding its reach to developing economies.
I first bought Akamai for $17.56 per share in September of 2008 when everyone else was panicking. I have both bought and sold shares since then, as P/E ratios have swung rather wildly (the 52 week high was $54.65, 52 weak low was $18.25).
For more detail see my Akamai (AKAM) Q3 2011 conference call summary.
Disclaimer: I am long AKAM, but occasionally trim or expand my position. I don't plan to trade AKAM in the next 3 days.
See also: www.akamai.com
Akamai is best known from the dot.com boom bust era, when it soared in price before it started showing profits. During the last decade its earnings have grown pretty steadily on a year to year basis. Its stock price and P/E ratio has been pretty well-aligned with reality. Today the trailing 12 month P/E is 26. Non-GAAP earnings for Q3 were up 10% y/y, and revenues were up 11%. The P/E is a bit high for this market, but the almost the entire market is undervalued due to fear still triumphing over greed.
Akamai's core business is content delivery, speeding up web page and file delivery from originators to consumers. Increasingly its income and profits are derived from "value-added" businesses, including security for cloud datacenters and DSA (dynamic site acceleration). It is also involved in accelerating the delivery of content to mobile devices.
As the amount of data delivered by the Internet, including cellular networks, grows, so does Akamai, presuming it maintains its large market share in the business. But prices also drop on a per unit basis as volume goes up. Akamai management believes that the delivery of video content is going to drive up volume, revenue and profits. While video data delivery is growing rapidly, it has not yet started to accelerate at rates that would compensate for Akamai's aggressive pricing to its clients.
There is always concern about competition, but mostly competitors have had to compete on price to win customers, making their profit margins thin or non-existent.
Akamai has $1.2 billion in cash and equivalents and generated $116 million in cash flow from operations in the quarter. They invested $47 million in capital expenditures. It is hard to compete with that, as I wrote in Akamai or Limelight? in January of this year.
At this price I am holding my Akamai stock, believing that downside risks are mainly market risks while upside potential is present from both increased video delivery and broader adoption of Akamai's cloud services solutions. Another bright spot is international revenue, which grew 15% y/y. Akamai started in the U.S. and is still expanding its reach to developing economies.
I first bought Akamai for $17.56 per share in September of 2008 when everyone else was panicking. I have both bought and sold shares since then, as P/E ratios have swung rather wildly (the 52 week high was $54.65, 52 weak low was $18.25).
For more detail see my Akamai (AKAM) Q3 2011 conference call summary.
Disclaimer: I am long AKAM, but occasionally trim or expand my position. I don't plan to trade AKAM in the next 3 days.
See also: www.akamai.com
Sunday, October 9, 2011
Earnings Preview: AMD, AKAM, GILD, BIIB, CELG
Earnings season is upon us again. Of the stocks I watch most closely (in this case because I own some of each of them), Akamai (AKAM) has scheduled its analyst conference for October 26, and Advanced Micro Devices (AMD) is on October 27. Gilead Sciences (GILD), Celgene (CELG), and Biogen Idec (BIIB) should also report before month's end, but have not yet set dates.
While the information in analyst conferences comes from management, and so can be biased, it is still essential listening for serious investors. At the end sell-side analysts are allowed to ask questions (some micro-caps even let investors ask questions), and on occasion an answer to a question can give important insights into the company. I take notes while I listen and even post them on the web; listen to management for a couple of years and you may be able to tell a lot from the way they answer or evade questions. Going back a few years and checking on how management's predictions worked out can also be illuminating.
Akamai typically is a high P/E stock that has to justify that ratio by showing continuous growth. Many companies have tried to compete with Akamai at accelerated delivery of web content, yet over a decade later Akamai still has incredible market share and has branched out into adjacent businesses like cloud security. Pricing has been an issue lately. Look to see if Akamai's volume of business is growing fast enough to compensate for falling prices. Q3 is a slowish quarter for content delivery, with a big bump coming from e-commerce in Q4, so Q4 guidance is also a key indicator of the health of this business.
AMD already pre-announced, sending the stock price into free-fall. This was as I predicted in AMD at Earnings Crossroad, but worse. The good side of the news is demand for AMD's new server and APU chips is strong. What we want to know from management is how strong is the demand, and how quickly can they gear up chip production to meet the demand.
Biogen Idec (BIIB) guided to low to mid single digit revenue growth over 2011, which for Q3 would run to roughtly $1.2 billion. Tysabri sales over $280 million would be a positive indicator, but the key question is data or FDA approvals for late-pipeline drugs like BG-12 or Daclizumab for multiple sclerosis, which are likely to be announced on other occasions.
Gilead (GILD) is a cash cow that has a low P/E due to patents expiring on some of its anti-viral drugs over the next decade. If management would pay a dividend, the value of the franchise would be more obvious. They are doing a lot of research on new anti-viral compounds that could kick growth into high gear again if approved. Expect something over $2 billion in revenue, $940 million in cash flow from operations. The key issue would be timelines for Endurant and and the "Quad" regimen. Don't expect the stock to budge much in this market until they pay a dividend or announce positive Phase III data for a hepatitis C multi-drug therapy (they are only in Phase II, so it will be a while).
Celgene (CELG) is another cash cow, but with a rapid revenue and profit growth rate (and a higher P/E). Look for Revlimid revenues over $800 million, Vidaza over $165 million or Abraxane, their newest drug, revenues breaking though $100 million in the quarter. Celgene has a pipeline of potential drugs that is so extensive it would take several articles just to go over them. See Celgene drug pipeline for a list. Unless they mostly strike out, anyone who does not buy Celgene at today's price will wish they had in five years, but long-term investors are hard to find in this market.
Disclaimer: I am long in all of these stocks.
While the information in analyst conferences comes from management, and so can be biased, it is still essential listening for serious investors. At the end sell-side analysts are allowed to ask questions (some micro-caps even let investors ask questions), and on occasion an answer to a question can give important insights into the company. I take notes while I listen and even post them on the web; listen to management for a couple of years and you may be able to tell a lot from the way they answer or evade questions. Going back a few years and checking on how management's predictions worked out can also be illuminating.
Akamai typically is a high P/E stock that has to justify that ratio by showing continuous growth. Many companies have tried to compete with Akamai at accelerated delivery of web content, yet over a decade later Akamai still has incredible market share and has branched out into adjacent businesses like cloud security. Pricing has been an issue lately. Look to see if Akamai's volume of business is growing fast enough to compensate for falling prices. Q3 is a slowish quarter for content delivery, with a big bump coming from e-commerce in Q4, so Q4 guidance is also a key indicator of the health of this business.
AMD already pre-announced, sending the stock price into free-fall. This was as I predicted in AMD at Earnings Crossroad, but worse. The good side of the news is demand for AMD's new server and APU chips is strong. What we want to know from management is how strong is the demand, and how quickly can they gear up chip production to meet the demand.
Biogen Idec (BIIB) guided to low to mid single digit revenue growth over 2011, which for Q3 would run to roughtly $1.2 billion. Tysabri sales over $280 million would be a positive indicator, but the key question is data or FDA approvals for late-pipeline drugs like BG-12 or Daclizumab for multiple sclerosis, which are likely to be announced on other occasions.
Gilead (GILD) is a cash cow that has a low P/E due to patents expiring on some of its anti-viral drugs over the next decade. If management would pay a dividend, the value of the franchise would be more obvious. They are doing a lot of research on new anti-viral compounds that could kick growth into high gear again if approved. Expect something over $2 billion in revenue, $940 million in cash flow from operations. The key issue would be timelines for Endurant and and the "Quad" regimen. Don't expect the stock to budge much in this market until they pay a dividend or announce positive Phase III data for a hepatitis C multi-drug therapy (they are only in Phase II, so it will be a while).
Celgene (CELG) is another cash cow, but with a rapid revenue and profit growth rate (and a higher P/E). Look for Revlimid revenues over $800 million, Vidaza over $165 million or Abraxane, their newest drug, revenues breaking though $100 million in the quarter. Celgene has a pipeline of potential drugs that is so extensive it would take several articles just to go over them. See Celgene drug pipeline for a list. Unless they mostly strike out, anyone who does not buy Celgene at today's price will wish they had in five years, but long-term investors are hard to find in this market.
Disclaimer: I am long in all of these stocks.
Monday, August 1, 2011
Akamai in Value Range Again
Akamai (AKAM), the internet content acceleration company, has been showing downward momentum since a peak at . It plunged after its Q2 earnings announcement on Wednesay. So why did I add to my Akamai position today?
Akamai has always been a good company. Its stock price, however, has been subjected to fits of mania and depression practically since its IPO in 1999, during the peak of the Bubble. When the recession hit in 2008 all the air went out and I was able to buy Akamai at bargain basement rates [$17.56/share]. Then the excitement returned, pushing Akamai up to valuations that just did not make sense considering where most other technology stock prices were. It was at $54 per share in December of 2010. I had sold part of my stake [at $44.80, nowhere near perfect, but not bad] by then. You might argue that I should have sold it all, but I tend to be as cautious selling stocks as I am buying them.
What is going on? Akamai has been growing revenues and profits. The question is, how fast can we expect growth to be in the future. Wednesday management said that Internet traffic this spring did not grow as fast as they expected, so they don't want to project as much growth for the rest of 2011 as they had in the past. [See my notes on the Akamai Q2 conference call for numbers and details]
I think the downward momentum has gone too far. That does not mean the stock price can't go lower, but it means I believe buying the stock at today's price is a good long-term investment. It might even be a good short term investment.
There are good, growing, well-managed technology stocks out there that have cheaper valuations (by P/E, etc.) than Akamai, but then I own several of them too. Akamai brings diversification to my portfolio. I believe I understand what Akamai does, how it makes it money, and what the competition is [See my extensive Akamai writings].
Internet traffic will continue to grow, and it will continue to become more complicated. Companies that depend on the internet need help with content delivery acceleration, with serving the fractured mobile device market, and with security. Akamai has managed to stay ahead of the competition for over a decade now. A slow quarter for internet traffic growth does not signal the end of Akamai. To me it signals a buying opportunity.
Do your research, think for yourself, and keep diversified!
See also Akamai Investor page
Akamai has always been a good company. Its stock price, however, has been subjected to fits of mania and depression practically since its IPO in 1999, during the peak of the Bubble. When the recession hit in 2008 all the air went out and I was able to buy Akamai at bargain basement rates [$17.56/share]. Then the excitement returned, pushing Akamai up to valuations that just did not make sense considering where most other technology stock prices were. It was at $54 per share in December of 2010. I had sold part of my stake [at $44.80, nowhere near perfect, but not bad] by then. You might argue that I should have sold it all, but I tend to be as cautious selling stocks as I am buying them.
What is going on? Akamai has been growing revenues and profits. The question is, how fast can we expect growth to be in the future. Wednesday management said that Internet traffic this spring did not grow as fast as they expected, so they don't want to project as much growth for the rest of 2011 as they had in the past. [See my notes on the Akamai Q2 conference call for numbers and details]
I think the downward momentum has gone too far. That does not mean the stock price can't go lower, but it means I believe buying the stock at today's price is a good long-term investment. It might even be a good short term investment.
There are good, growing, well-managed technology stocks out there that have cheaper valuations (by P/E, etc.) than Akamai, but then I own several of them too. Akamai brings diversification to my portfolio. I believe I understand what Akamai does, how it makes it money, and what the competition is [See my extensive Akamai writings].
Internet traffic will continue to grow, and it will continue to become more complicated. Companies that depend on the internet need help with content delivery acceleration, with serving the fractured mobile device market, and with security. Akamai has managed to stay ahead of the competition for over a decade now. A slow quarter for internet traffic growth does not signal the end of Akamai. To me it signals a buying opportunity.
Do your research, think for yourself, and keep diversified!
See also Akamai Investor page
Tuesday, February 15, 2011
Akamai, Limelight Compared
Akamai Technologies' (AKAM) stock price plunged late last week after fourth quarter (Q4) earnings were released. Limelight Networks (LLNW) stock price jumped today after Q4 2010 earnings were released yesterday. That would seem to indicate that Limelight is the better stock deal.
Both companies compete at helping other companies deliver content over the Internet. In addition to the basic service of accelerating the delivery of web pages, both are involved in cloud computing solutions and ad services. Akamai offers other value-added solutions like security.
Akamai is the much larger company, with Q4 revenues of $284.7 million; Limelight revenue was $55.2 million; those were records for both companies. Disclosure: I own some Akamai, but not Limelight, so for me the question might be, should I buy Limelight in addition to, or in place of Akamai? The stock movements would indicate Limelight, the smaller company, is moving in fast on Akamai's business.
Profits however, are mainly an Akamai story. Its Q4 GAAP net income was $52.5 million; non-GAAP net income was $76.5 million; EBITDA was $129.2 million; cash from operations was $110.4 million. So Akamai profits, by any measure, are near or above Limelight revenues. Limelight had a GAAP net loss of $6.3 million, non-GAAP net income of $1.5 million, and EBITDA of $8.1 million.
Using the measure that makes Limelight look best by comparison, EBITDA, let's look at the stock value. As I write Akamai is selling for $42.46 per share, giving it a market cap of $7.74 billion. Limelight is selling for $8.27 per share, giving it a market cap of $820 million. Taking market cap divided by annualized EBITDA, Akamai is at a ratio of 59.9. Limelight is at a ratio of 101.2.
The results are worse for Limelight if you look at other P/E type ratios (and if you use the conservative GAAP P/E, Limelight looks like a black hole).
I would argue that both Akamai and Limelight are overpriced stocks based on comparing the stock price to various earnings per share measures. Usually when stocks have high P/Es they have explosive growth rates that justify those stats. How does growth look?
Using Q4 2010 to Q4 2011 comparisons, Limelight had revenue growth of 64%; Akamai's growth was 19%, considerably slower. Limelight went from GAAP net loss of $9.7 million to a net loss of $6.3 million, not really that great on such a large revenue boost. Akamai GAAP net income was up 31% y/y.
All in all, the sector (there are a few other players besides Akamai and Limelight), while it may be a favorite of investment funds, has a lot of risk built into it right now. The sector is growing quickly, and is likely to accelerate along with the Internet. On the other hand much of that growth is already priced in. Limelight is growing revenue faster that Akamai, but Akamai has made it clear its interest is in profitable revenue. Limelight apparently is willing to pick up any revenue at all, but that gives it low margins, not what you want to see with a high-priced stock.
I reduced my Akamai holdings as it ran up in 2010. The stock I have now I bought for $17.56 per share in September of 2008 when everyone else was panicking.
From my conservative, value-oriented investing perspective, there are a lot better technology stock plays available now than either Akamai or Limelight. Because I already hold Akamai, and think it will justify its current price pretty well during the course of 2011, I am holding on to what I have. But I would not have a strong argument with anyone saying sell these stocks right now and buy stocks with good growth prospects and lower PEs.
Note that both companies are good companies with great management and technologies. My objection is not to the companies, but to the stock prices relative to proven profits.
See also: http://www.sgi.com ; http://www.limelightnetworks.com/
Both companies compete at helping other companies deliver content over the Internet. In addition to the basic service of accelerating the delivery of web pages, both are involved in cloud computing solutions and ad services. Akamai offers other value-added solutions like security.
Akamai is the much larger company, with Q4 revenues of $284.7 million; Limelight revenue was $55.2 million; those were records for both companies. Disclosure: I own some Akamai, but not Limelight, so for me the question might be, should I buy Limelight in addition to, or in place of Akamai? The stock movements would indicate Limelight, the smaller company, is moving in fast on Akamai's business.
Profits however, are mainly an Akamai story. Its Q4 GAAP net income was $52.5 million; non-GAAP net income was $76.5 million; EBITDA was $129.2 million; cash from operations was $110.4 million. So Akamai profits, by any measure, are near or above Limelight revenues. Limelight had a GAAP net loss of $6.3 million, non-GAAP net income of $1.5 million, and EBITDA of $8.1 million.
Using the measure that makes Limelight look best by comparison, EBITDA, let's look at the stock value. As I write Akamai is selling for $42.46 per share, giving it a market cap of $7.74 billion. Limelight is selling for $8.27 per share, giving it a market cap of $820 million. Taking market cap divided by annualized EBITDA, Akamai is at a ratio of 59.9. Limelight is at a ratio of 101.2.
The results are worse for Limelight if you look at other P/E type ratios (and if you use the conservative GAAP P/E, Limelight looks like a black hole).
I would argue that both Akamai and Limelight are overpriced stocks based on comparing the stock price to various earnings per share measures. Usually when stocks have high P/Es they have explosive growth rates that justify those stats. How does growth look?
Using Q4 2010 to Q4 2011 comparisons, Limelight had revenue growth of 64%; Akamai's growth was 19%, considerably slower. Limelight went from GAAP net loss of $9.7 million to a net loss of $6.3 million, not really that great on such a large revenue boost. Akamai GAAP net income was up 31% y/y.
All in all, the sector (there are a few other players besides Akamai and Limelight), while it may be a favorite of investment funds, has a lot of risk built into it right now. The sector is growing quickly, and is likely to accelerate along with the Internet. On the other hand much of that growth is already priced in. Limelight is growing revenue faster that Akamai, but Akamai has made it clear its interest is in profitable revenue. Limelight apparently is willing to pick up any revenue at all, but that gives it low margins, not what you want to see with a high-priced stock.
I reduced my Akamai holdings as it ran up in 2010. The stock I have now I bought for $17.56 per share in September of 2008 when everyone else was panicking.
From my conservative, value-oriented investing perspective, there are a lot better technology stock plays available now than either Akamai or Limelight. Because I already hold Akamai, and think it will justify its current price pretty well during the course of 2011, I am holding on to what I have. But I would not have a strong argument with anyone saying sell these stocks right now and buy stocks with good growth prospects and lower PEs.
Note that both companies are good companies with great management and technologies. My objection is not to the companies, but to the stock prices relative to proven profits.
See also: http://www.sgi.com ; http://www.limelightnetworks.com/
Friday, October 29, 2010
Akamai Q3 2010 Analyst Conference Call
Akamai (AKAM), which provides accelerated Internet services to enterprises, showed some of its promise in Q3. Akamai's trailing P/E is still pretty pricy by my standards, but then I bought AKAM back during the recession when its PE was much more reasonable.
GAAP Revenue was $253.6 million, up 3% sequentially from $245.3 million and up 21% from $206.5 million in the year-earlier quarter. GAAP Net income was $39.7 million, up 4% sequentially from $38.1 million and up 21% from $32.7 million year-earlier. GAAP EPS (earnings per share) were $0.21, up 5% sequentially from $0.20 and up 17% from $0.18 year-earlier.
Using GAAP numbers, Akamai's PE as I write (stock price $51.60) is 63, using annualized Q3 earnings. NASDAQ is listing non-GAAP PE as 35 trailing (last 4 quarters) or 32 forward looking (predicted next 4 quarters). That is pricey compared to semiconductor growth stocks like Marvell (MRVL - trailing PE 13) and Microchip (MCHP - trailing PE 20), which I also own.
I like GAAP numbers for conservative investing, but it is true that for Akamai you might want to look at Q3 cash from operations of $118 million or EBITDA at $114 million.
Why the excitement over Akamai? In theory it could ramp profits faster than revenues, and with Internet usage continuing to vastly outpace economic growth, profits could grow rapidly. However, the promise of rapid profit growth eluded Akamai in 2009 and in 2010 until Q3.
Negative opinions of Akamai mainly come from over regard for competitors. For as long as I can remember, competitors were going to take significant business from Akamai in the next couple of years. A couple of years pass, and if anything Akamai has gained market share. Akamai seems to know how to maintain its market advantage without blowing too much money on R&D.
I would not buy Akamai at this price, but then I already own a reasonable amount. There is certainly an argument that this price will look cheap in a couple of years, maybe even by mid 2011. For a much more detailed look, see my Akamai Analyst Call Q3 2010 summary.
See also www.akamai.com
GAAP Revenue was $253.6 million, up 3% sequentially from $245.3 million and up 21% from $206.5 million in the year-earlier quarter. GAAP Net income was $39.7 million, up 4% sequentially from $38.1 million and up 21% from $32.7 million year-earlier. GAAP EPS (earnings per share) were $0.21, up 5% sequentially from $0.20 and up 17% from $0.18 year-earlier.
Using GAAP numbers, Akamai's PE as I write (stock price $51.60) is 63, using annualized Q3 earnings. NASDAQ is listing non-GAAP PE as 35 trailing (last 4 quarters) or 32 forward looking (predicted next 4 quarters). That is pricey compared to semiconductor growth stocks like Marvell (MRVL - trailing PE 13) and Microchip (MCHP - trailing PE 20), which I also own.
I like GAAP numbers for conservative investing, but it is true that for Akamai you might want to look at Q3 cash from operations of $118 million or EBITDA at $114 million.
Why the excitement over Akamai? In theory it could ramp profits faster than revenues, and with Internet usage continuing to vastly outpace economic growth, profits could grow rapidly. However, the promise of rapid profit growth eluded Akamai in 2009 and in 2010 until Q3.
Negative opinions of Akamai mainly come from over regard for competitors. For as long as I can remember, competitors were going to take significant business from Akamai in the next couple of years. A couple of years pass, and if anything Akamai has gained market share. Akamai seems to know how to maintain its market advantage without blowing too much money on R&D.
I would not buy Akamai at this price, but then I already own a reasonable amount. There is certainly an argument that this price will look cheap in a couple of years, maybe even by mid 2011. For a much more detailed look, see my Akamai Analyst Call Q3 2010 summary.
See also www.akamai.com
Sunday, August 8, 2010
Akamai Q2 2010 and Future Trends
On July 28 Akamai Technologies held its analyst conference call and reported second quarter 2010 results. You can read my detailed notes on the call at Akamai Q2 2010 Analyst Conference Call.
Before the call there was a lot of buzz about spectacular results fueled by people watching the World Cup over the Internet, which means on Akamai-accelerated services. As management has said in the past, no one event, not even the World Cup, is going to have a significant impact on revenue in a quarter. In Q4s the holiday-driven advertisement traffic does push up Akamai's numbers, but again this is a macro effect, not due to any one customer.
Akamai had a high P/E ratio comparted to most other growing technology companies both before and after the non-event driven spike, but it is not high by historic standards. Rather, the other tech stocks are low. Still, selling a high P/E stock and buying an all-other-thing-equal but a low P/E stock is a good way to reduce risk. So the sell off after Q2 results were reported is not a big surprise. The results were good, but some short-term investors were deluding themselves as to how good. The stock was in the 40s in most of June and July, only to fall below 38 after the conference call.
Aside from P/Es returning to normal, which will help all stocks, Akamai has a lot to recommend it. The internet continues to grow and commercial customers need reliable, fast delivery. Whether it is ads, online stores, or video feeds, the Internet works much better over Akamai's system. In the future revenues should grow more quickly than either Akamai's capital expenditures (mainly on servers) or operating expenses. The increased use of high-bandwidth mobile devices will also grow Akamai revenues.
On the negative side AKAM's real tax rate is going up, mostly in 2011, as it uses up its NOLs (losses from startup years).
But keep in mind this growth will be relatively steady, with extra acceleration every fourth quarter. One time events won't matter too much.
And keep diversified!
See also http://www.akamai.com/
Before the call there was a lot of buzz about spectacular results fueled by people watching the World Cup over the Internet, which means on Akamai-accelerated services. As management has said in the past, no one event, not even the World Cup, is going to have a significant impact on revenue in a quarter. In Q4s the holiday-driven advertisement traffic does push up Akamai's numbers, but again this is a macro effect, not due to any one customer.
Akamai had a high P/E ratio comparted to most other growing technology companies both before and after the non-event driven spike, but it is not high by historic standards. Rather, the other tech stocks are low. Still, selling a high P/E stock and buying an all-other-thing-equal but a low P/E stock is a good way to reduce risk. So the sell off after Q2 results were reported is not a big surprise. The results were good, but some short-term investors were deluding themselves as to how good. The stock was in the 40s in most of June and July, only to fall below 38 after the conference call.
Aside from P/Es returning to normal, which will help all stocks, Akamai has a lot to recommend it. The internet continues to grow and commercial customers need reliable, fast delivery. Whether it is ads, online stores, or video feeds, the Internet works much better over Akamai's system. In the future revenues should grow more quickly than either Akamai's capital expenditures (mainly on servers) or operating expenses. The increased use of high-bandwidth mobile devices will also grow Akamai revenues.
On the negative side AKAM's real tax rate is going up, mostly in 2011, as it uses up its NOLs (losses from startup years).
But keep in mind this growth will be relatively steady, with extra acceleration every fourth quarter. One time events won't matter too much.
And keep diversified!
See also http://www.akamai.com/
Monday, May 3, 2010
Akamai Q1 Upside Surprise
Akamai (AKAM) had a kickass first quarter of 2010. Q1 is usually a down quarter for the Internet delivery acceleration company because there is a fall off advertising. Making sure that ads get delivered efficiently along with the other content of web pages is a major task for Akamai. Also many sell-side (brokerage house) analysts did not like Akamai's lowering of its prices to attract more volume in 2009.
But revenue was $240.0 million in Q1, up 1% sequentially from $238.3 million, and up 14% from $210.4 million in Q1 of 2009. Net income was $40.9 million, up 2% sequentially from $40.1 million, and up 10% from $37.1 million year-earlier. GAAP EPS (earnings per share) were $0.22, up 5% sequentially from $0.21, and up 10% from $0.20 year-earlier.
In other words, by helping its customers with lower prices, Akamai helped itself.
Although I like GAAP numbers because they are usually conservative, in Akamai's case the cash position is better than normal compared to GAAP. Cash from operations was $87.8 million, compared to net income of $40.9 million. Of course AKAM continues to invest heavily in iteslf: capital expenses in the quarter were $35.1. My guess is this is very well-deployed capital. Most of it pays for servers that are expanding Akamai's global reach. 78% of revenues are still from the U.S.
In its startup period Akamia lost money, accumulating NOLs (net offsetting losses). It has been using the NOLs these last few years to lower its tax rate. The NOLs run out this year, so its cash tax rate will go up. I'd rather make profits and pay taxes than accumulate losses.
There are a lot of companies trying to compete with Akamai, so it does not constitute a risk-free investment. So far, however, no company has come close to being able to match Akamai at Internet content delivery. While I would not describe Akamai's current stock price as cheap, it is likely to seem so later as Internet video delivery picks up steam, to Akamai's benefit.
See also my Akamai Q1 2010 analyst conference summary for April 28, 2010.
I have been a long-term Akamai investor since January 2008. My own business includes technology consulting and buy-side analysis.
See also www.akamai.com
Akamai at Wikipedia
NASDAQ Akamai summary page
But revenue was $240.0 million in Q1, up 1% sequentially from $238.3 million, and up 14% from $210.4 million in Q1 of 2009. Net income was $40.9 million, up 2% sequentially from $40.1 million, and up 10% from $37.1 million year-earlier. GAAP EPS (earnings per share) were $0.22, up 5% sequentially from $0.21, and up 10% from $0.20 year-earlier.
In other words, by helping its customers with lower prices, Akamai helped itself.
Although I like GAAP numbers because they are usually conservative, in Akamai's case the cash position is better than normal compared to GAAP. Cash from operations was $87.8 million, compared to net income of $40.9 million. Of course AKAM continues to invest heavily in iteslf: capital expenses in the quarter were $35.1. My guess is this is very well-deployed capital. Most of it pays for servers that are expanding Akamai's global reach. 78% of revenues are still from the U.S.
In its startup period Akamia lost money, accumulating NOLs (net offsetting losses). It has been using the NOLs these last few years to lower its tax rate. The NOLs run out this year, so its cash tax rate will go up. I'd rather make profits and pay taxes than accumulate losses.
There are a lot of companies trying to compete with Akamai, so it does not constitute a risk-free investment. So far, however, no company has come close to being able to match Akamai at Internet content delivery. While I would not describe Akamai's current stock price as cheap, it is likely to seem so later as Internet video delivery picks up steam, to Akamai's benefit.
See also my Akamai Q1 2010 analyst conference summary for April 28, 2010.
I have been a long-term Akamai investor since January 2008. My own business includes technology consulting and buy-side analysis.
See also www.akamai.com
Akamai at Wikipedia
NASDAQ Akamai summary page
Friday, February 5, 2010
Akamai Accelerates Profits in Q4
Akamai (AKAM), the internet acceleration specialists, saw accelerating revenues in the fourth quarter of 2009. This is typically a seasonally strong quarter for Akamai due to the increase in internet shopping for the holidays.
Revenue was $238.3, up 15% sequentially from $206.5 million, and up 12% from $212.6 million in the year-earlier quarter.
Profits were good, but slightly below Q4 in 2008. GAAP Net income was $40.1 million, up 23% sequentially from $32.7 million, but down 1% from $40.5 million year-earlier. EPS (earnings per share) were $0.21, up 17% sequentially from $0.18, but down 5% from $0.22 year-earlier.
As to guidance, the March quarter is expected to be seasonally down.
With Akamai there is an argument that you should look beyond the GAAP numbers. Cash flow from operations was $124.9 million, far greater than GAAP net income. One difference is that taxes actually paid have been far lower than taxes for GAAP purchases, due to use of NOLs (net outstanding losses) generated during Akamai's startup period. However, in the analyst conference (held February 3, 2010), management said that in 2011 Akamai will become a full tax payer, so the gap between GAAP and Non-GAAP net income and EPS should narrow to more typical numbers.
Akamai believes that its value-added services will continue to drive revenues and profits as the internet bandwidth expands globally.
For details on what management said at the conference, including responses to questions from analysts, see my Akamai (AKAM) analyst conference summary for Q4 2009.
And of course see Akamai's site, www.akamai.com.
I own some Akamai stock.
And Keep Diversified!
Revenue was $238.3, up 15% sequentially from $206.5 million, and up 12% from $212.6 million in the year-earlier quarter.
Profits were good, but slightly below Q4 in 2008. GAAP Net income was $40.1 million, up 23% sequentially from $32.7 million, but down 1% from $40.5 million year-earlier. EPS (earnings per share) were $0.21, up 17% sequentially from $0.18, but down 5% from $0.22 year-earlier.
As to guidance, the March quarter is expected to be seasonally down.
With Akamai there is an argument that you should look beyond the GAAP numbers. Cash flow from operations was $124.9 million, far greater than GAAP net income. One difference is that taxes actually paid have been far lower than taxes for GAAP purchases, due to use of NOLs (net outstanding losses) generated during Akamai's startup period. However, in the analyst conference (held February 3, 2010), management said that in 2011 Akamai will become a full tax payer, so the gap between GAAP and Non-GAAP net income and EPS should narrow to more typical numbers.
Akamai believes that its value-added services will continue to drive revenues and profits as the internet bandwidth expands globally.
For details on what management said at the conference, including responses to questions from analysts, see my Akamai (AKAM) analyst conference summary for Q4 2009.
And of course see Akamai's site, www.akamai.com.
I own some Akamai stock.
And Keep Diversified!
Thursday, May 21, 2009
Akamai Future Trends
Does Akamai have what it takes to make long term investors happy even after this recession ends and stock prices go to normal levels relative to fundamentals?
I am not sure. Akamai accelerates the Internet. They are good at it. They have a technological edge over all rivals. I would not be surprised if the size of Akamai, measured in terms of revenues or net income, is ten times today's ten years from now. On the other hand, we are going into uncharted terrain where you can't just draw a line on a graph and assume it will rise linearly or exponentially forever.
It does seem likely that Internet usage, measured in bits delivered, will continue to grow for the foreseeable future. But it might not. Much of the growth in the past ten years has been driven by the shift to bandwidth intensive applications. Sending a text email over the net involves shifting a few bits. Sending a small image as an attachment with the email can increase the number of bits by an order or more of magnitude. Audio and high quality still pictures require another order of magnitude or more of data transfer. The short videos made for tiny windows of a few years ago upped the stakes yet again.
The number of people using the Internet, however, no longer climbs at the dizzying rate of the 1990s. Most of the growth in new customers now comes in developing countries. In some nations, like the U.S., the failure to provide a comprehensive broadband infrastructure has also put a damper on Internet data transfer growth. You can't do much with video when you access the net with a dial-up modem connection. But to the extent people start expecting DVD quality or HD quality video over the Internet, we still have a long way to go in increased bandwidth.
Your guess is as good as the experts. My guess is that it will be at least five to ten years before Internet growth rates really flatten out.
So if Akamai maintains market share, we can look forward to a good decade. What are the chances Akamai will gain or lose market share?
It is easy to see Akamai gaining market share. They simply accelerate Internet delivery faster than any other company can. Right now. You don't want to run a major merchant web site right now without Akamai's help.
Akamai is also starting to have better penetration outside the U.S. That alone could be a major growth driver.
On the other hand, plenty of would-be competitors exist. Most are losing money, but some may reach the inflection point where they have enough customers to make money. The really big companies that are well-situated to compete with Akamai are Cisco and Oracle. Cisco, in particular, probably possesses the skills to do well in the Web acceleration business. But Cisco has a lot of other fires burning right now. Akamai is thriving on specialization.
So I would judge competition to be a threat, but not enough of a threat to bet against Akamai staying on top for at least the next few years.
How did Akamai do in the latest quarter?
Revenue was $210.4 million, down 1% sequentially from $212.6 million and up 12% from $187.0 million year-earlier.
Net income was $37.1 million, down 9% sequentially from $40.5 million, but up slightly from $36.9 million year-earlier.
EPS (earnings per share) were $0.20, down 9% sequentially from $0.22, and flat from $0.20 year-earlier.
Cash from operations was $90.5 million, up 3% y/y. The company held $848.5 million in cash and equivalents at the end of the quarter. There are $200 million in convertible notes outstanding. Capital expenditures were $25.0 million.
See my Akamai Analyst Conference Summary of April 29, 2009 for a higher level of detail.
Akamai Investor Relations page
My Akamai main page
I am not sure. Akamai accelerates the Internet. They are good at it. They have a technological edge over all rivals. I would not be surprised if the size of Akamai, measured in terms of revenues or net income, is ten times today's ten years from now. On the other hand, we are going into uncharted terrain where you can't just draw a line on a graph and assume it will rise linearly or exponentially forever.
It does seem likely that Internet usage, measured in bits delivered, will continue to grow for the foreseeable future. But it might not. Much of the growth in the past ten years has been driven by the shift to bandwidth intensive applications. Sending a text email over the net involves shifting a few bits. Sending a small image as an attachment with the email can increase the number of bits by an order or more of magnitude. Audio and high quality still pictures require another order of magnitude or more of data transfer. The short videos made for tiny windows of a few years ago upped the stakes yet again.
The number of people using the Internet, however, no longer climbs at the dizzying rate of the 1990s. Most of the growth in new customers now comes in developing countries. In some nations, like the U.S., the failure to provide a comprehensive broadband infrastructure has also put a damper on Internet data transfer growth. You can't do much with video when you access the net with a dial-up modem connection. But to the extent people start expecting DVD quality or HD quality video over the Internet, we still have a long way to go in increased bandwidth.
Your guess is as good as the experts. My guess is that it will be at least five to ten years before Internet growth rates really flatten out.
So if Akamai maintains market share, we can look forward to a good decade. What are the chances Akamai will gain or lose market share?
It is easy to see Akamai gaining market share. They simply accelerate Internet delivery faster than any other company can. Right now. You don't want to run a major merchant web site right now without Akamai's help.
Akamai is also starting to have better penetration outside the U.S. That alone could be a major growth driver.
On the other hand, plenty of would-be competitors exist. Most are losing money, but some may reach the inflection point where they have enough customers to make money. The really big companies that are well-situated to compete with Akamai are Cisco and Oracle. Cisco, in particular, probably possesses the skills to do well in the Web acceleration business. But Cisco has a lot of other fires burning right now. Akamai is thriving on specialization.
So I would judge competition to be a threat, but not enough of a threat to bet against Akamai staying on top for at least the next few years.
How did Akamai do in the latest quarter?
Revenue was $210.4 million, down 1% sequentially from $212.6 million and up 12% from $187.0 million year-earlier.
Net income was $37.1 million, down 9% sequentially from $40.5 million, but up slightly from $36.9 million year-earlier.
EPS (earnings per share) were $0.20, down 9% sequentially from $0.22, and flat from $0.20 year-earlier.
Cash from operations was $90.5 million, up 3% y/y. The company held $848.5 million in cash and equivalents at the end of the quarter. There are $200 million in convertible notes outstanding. Capital expenditures were $25.0 million.
See my Akamai Analyst Conference Summary of April 29, 2009 for a higher level of detail.
Akamai Investor Relations page
My Akamai main page
Thursday, February 5, 2009
Akamai Accelerates Delivery
Akamai (AKAK) investors were presently surprised by 4th quarter results released Wednesday. Starting after hours and continuing into Thursday new money poured into the stock, thrusting the price up. I own Akamai stock, but I looked at it for years before purchasing it. If you want some deep background on Akamai, go to my Akamai analyst conferences summaries page, which includes links to my articles on what Akamai does, how they do it, and how the profits are generated.
Fourth quarter 2008 results were not even spectacular by Akamai standards. Revenue was $212.6 million, up 8% sequentially from $197.3 million and up 16% from $183.2 million year-earlier. In past years revenues have grown faster. But this is in sharp contrast to 95% of the technology companies reports on the December quarter. During 2008 everyone said their company gave such great ROI (return on investment) that they would continue to see growth through a recession. Most did until Q2. Many did in Q3. But in Q4 almost every company saw a significant downturn. Even mighty Cisco reported falling revenues yesterday.
Akamai profits were good by any measure. Using the most conservative measure, GAAP net income was $40.5 million. But cash from operations was $92 million and the ending balance for cash and equivalents was $772 million.
Akamai has been periodically raided on rumors that competitors were going to steal its thunder. I don't want to underestimate the role of competition in technology. Akamai has a profitable model, and big companies with lagging sales will eye those profits and try to capture them, and startups will eye them. But so far Akamai has had a significant technological advantage over its competitors. Its systems work well. No competitor has introduced as capable of a system, so they have to compete on pricing. When they win an occasional deal, they often lose money or just break even. Meanwhile Akamai generates cash and uses that cash to see that its technology is the best. They have also added what Cisco likes to call "adjacent" technologies. Akamai calls them value-added technologies. When Akamai has a contract for its basic service - speeding up the delivery of Internet content - it is in a good position to offer higher margin, more specialized services as well.
Guidance is for flat to down revenues in the first quarter of 2009, but that is a typical seasonal effect from the post-holiday drop in e-commerce. The Web is still in explosive growth mode, with video downloads becoming prevalent, soaking up bandwidth. Akamai's fortunes are carried along by that explosive growth.
I think Cicso CEO John Chambers is right in believing that Internet traffic is not going to slow down; just the opposite. So ISPs and carriers are going to have no choice but to lay more wire and install higher capacity routers. They delayed doing that in the December quarter, they might delay capital expenditures in the March 2009 quarter, but they are just getting behind the curve and will have to make up for it at some point.
In the meantime Akamai is not dependent on major capital expenditures by its customers. There are a lot of customers, and Akamai services are a relatively small recurring part of their Web delivery budgets.
There have been times when, by my analysis, Akamai stock has been overpriced, but now is not one of those times, even with today's pop.
Don't forget the risk even for good companies, and
Keep diversified.
See also: www.akamai.com
Fourth quarter 2008 results were not even spectacular by Akamai standards. Revenue was $212.6 million, up 8% sequentially from $197.3 million and up 16% from $183.2 million year-earlier. In past years revenues have grown faster. But this is in sharp contrast to 95% of the technology companies reports on the December quarter. During 2008 everyone said their company gave such great ROI (return on investment) that they would continue to see growth through a recession. Most did until Q2. Many did in Q3. But in Q4 almost every company saw a significant downturn. Even mighty Cisco reported falling revenues yesterday.
Akamai profits were good by any measure. Using the most conservative measure, GAAP net income was $40.5 million. But cash from operations was $92 million and the ending balance for cash and equivalents was $772 million.
Akamai has been periodically raided on rumors that competitors were going to steal its thunder. I don't want to underestimate the role of competition in technology. Akamai has a profitable model, and big companies with lagging sales will eye those profits and try to capture them, and startups will eye them. But so far Akamai has had a significant technological advantage over its competitors. Its systems work well. No competitor has introduced as capable of a system, so they have to compete on pricing. When they win an occasional deal, they often lose money or just break even. Meanwhile Akamai generates cash and uses that cash to see that its technology is the best. They have also added what Cisco likes to call "adjacent" technologies. Akamai calls them value-added technologies. When Akamai has a contract for its basic service - speeding up the delivery of Internet content - it is in a good position to offer higher margin, more specialized services as well.
Guidance is for flat to down revenues in the first quarter of 2009, but that is a typical seasonal effect from the post-holiday drop in e-commerce. The Web is still in explosive growth mode, with video downloads becoming prevalent, soaking up bandwidth. Akamai's fortunes are carried along by that explosive growth.
I think Cicso CEO John Chambers is right in believing that Internet traffic is not going to slow down; just the opposite. So ISPs and carriers are going to have no choice but to lay more wire and install higher capacity routers. They delayed doing that in the December quarter, they might delay capital expenditures in the March 2009 quarter, but they are just getting behind the curve and will have to make up for it at some point.
In the meantime Akamai is not dependent on major capital expenditures by its customers. There are a lot of customers, and Akamai services are a relatively small recurring part of their Web delivery budgets.
There have been times when, by my analysis, Akamai stock has been overpriced, but now is not one of those times, even with today's pop.
Don't forget the risk even for good companies, and
Keep diversified.
See also: www.akamai.com
Thursday, November 6, 2008
Akamai (AKAM) Grows Through Recession
Akamai accelerates content delivery over the Internet. This is particularly important to companies that sell merchandise, but it is also important for companies that generate revenue from advertisements. Akamai's revenue growth rate has slowed, but it is still growing despite the economic turmoil that has knocked down revenues at many technology companies.
Akamai reported revenue for the quarter ending September 30, 2008 (Q3) at $197.3 million, up 2% sequentially from $194.0 million and up 22% from $161.2 million year-earlier.
GAAP net income was $33.4 million, down 3% sequentially from $34.3 million but up 36% from $24.6 million year-earlier. GAAP EPS (earnings per share) were $0.18.
Those are great results (for more details see my Akamai (AKAM) analyst conference summary for Q3 2008). When it comes down to it, almost no one wants to save a little money in a downturn by making the response time of their Web site climb, which would lose customers and revenues.
For the fourth quarter, management guided to revenue of $202 to $210 million. This includes $4 to $5 million revenue from the Acerno acquisition. Q4 is usually a strong one for Akamai. They are expecting some impact from the economic softening, with advertisement dollars weak and Internet sales not climbing as fast as in the past few years.
83 new customers were signed in the quarter, and Akamai's newer value-added services contributed significantly to revenue and to the ability to get new customers.
Akamai is also getting more directly into the advertisement business with its Advertising Decisions Solutions segment. Acerno was bought to help with that. Once Acerno is integrated with Akamai, expect revenue from this segment to grow through 2009 and beyond.
Akamai still seems to be able to stay ahead of competitors in the Internet acceleration arena. Since Akamai is profitable and many of its competitors are not, it is possible there will be consolidation to Akamai's benefit if the recession lasts in 2009. Also Akamai's customers are mostly profitable at this point. Competitors have tended to pick up newer companies that are not yet making profits.
On the other hand, I don't think Akamai would be immune to a severe recession. At some point it would lose enough customers to impact net income substantially.
Fortunately, Akamai generates a lot of cash compared to revenues. Cash from operations in the quarter was an amazing $93 million, an amazing 47% of revenue.
Akamai also had plenty of cash on its balance sheets, $789 million at the end of the quarter.
A year ago if you wanted to buy Akamai stock you would have paid dearly for it. Today, like most stocks, it is a bargain. I own some Akamai stock, so consider that I may be biased.
There is risk everywhere, but there is opportunity in quite a few places too, so
Keep diversified.
More data:
http://www.akamai.com/
My main Akamai analyst conferences page
More Technology Stock Analyst Conference Summaries
Akamai reported revenue for the quarter ending September 30, 2008 (Q3) at $197.3 million, up 2% sequentially from $194.0 million and up 22% from $161.2 million year-earlier.
GAAP net income was $33.4 million, down 3% sequentially from $34.3 million but up 36% from $24.6 million year-earlier. GAAP EPS (earnings per share) were $0.18.
Those are great results (for more details see my Akamai (AKAM) analyst conference summary for Q3 2008). When it comes down to it, almost no one wants to save a little money in a downturn by making the response time of their Web site climb, which would lose customers and revenues.
For the fourth quarter, management guided to revenue of $202 to $210 million. This includes $4 to $5 million revenue from the Acerno acquisition. Q4 is usually a strong one for Akamai. They are expecting some impact from the economic softening, with advertisement dollars weak and Internet sales not climbing as fast as in the past few years.
83 new customers were signed in the quarter, and Akamai's newer value-added services contributed significantly to revenue and to the ability to get new customers.
Akamai is also getting more directly into the advertisement business with its Advertising Decisions Solutions segment. Acerno was bought to help with that. Once Acerno is integrated with Akamai, expect revenue from this segment to grow through 2009 and beyond.
Akamai still seems to be able to stay ahead of competitors in the Internet acceleration arena. Since Akamai is profitable and many of its competitors are not, it is possible there will be consolidation to Akamai's benefit if the recession lasts in 2009. Also Akamai's customers are mostly profitable at this point. Competitors have tended to pick up newer companies that are not yet making profits.
On the other hand, I don't think Akamai would be immune to a severe recession. At some point it would lose enough customers to impact net income substantially.
Fortunately, Akamai generates a lot of cash compared to revenues. Cash from operations in the quarter was an amazing $93 million, an amazing 47% of revenue.
Akamai also had plenty of cash on its balance sheets, $789 million at the end of the quarter.
A year ago if you wanted to buy Akamai stock you would have paid dearly for it. Today, like most stocks, it is a bargain. I own some Akamai stock, so consider that I may be biased.
There is risk everywhere, but there is opportunity in quite a few places too, so
Keep diversified.
More data:
http://www.akamai.com/
My main Akamai analyst conferences page
More Technology Stock Analyst Conference Summaries
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
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
Thursday, January 3, 2008
Akamai (AKAM) bought
This is just to quickly note that I bought a small amount of Akamai (AKAM) stock yesterday. I have written quite a bit on Akamai (see my Akamai page). As long as I hold the stock you might want to consider a possible bias.
To sum up, Akamai has proven itself profitable these last few years. It is still growing rapidly. Its price to earnings ratio was too high for me 6 months ago, but it was quite reasonable yesterday (January 2, 2008).
I believe all the stocks in my portfolio are undervalued at this point, as are most of the stocks in U.S. stock markets. However, rather than adding to current positions, I am taking this opportunity to diversify.
The main dangers to Akamai's stock price are now competitive. It has proven that a special market - Internet content acceleration - can be very profitable. This means both bigger players (possibly Cisco, Google, or Microsoft) or a swarm of startups may try to grab this luscious pie. I am hoping that Akamai's lead in technology and customer satisfaction will allow them to fend off any near-term competition.
Akamai will be reporting its latest quarter results the end of January. As usual, I plan to listen to the analyst conference and post a summary at www.openicon.com.
You can also check out akamai's web site: www.akamai.com
To sum up, Akamai has proven itself profitable these last few years. It is still growing rapidly. Its price to earnings ratio was too high for me 6 months ago, but it was quite reasonable yesterday (January 2, 2008).
I believe all the stocks in my portfolio are undervalued at this point, as are most of the stocks in U.S. stock markets. However, rather than adding to current positions, I am taking this opportunity to diversify.
The main dangers to Akamai's stock price are now competitive. It has proven that a special market - Internet content acceleration - can be very profitable. This means both bigger players (possibly Cisco, Google, or Microsoft) or a swarm of startups may try to grab this luscious pie. I am hoping that Akamai's lead in technology and customer satisfaction will allow them to fend off any near-term competition.
Akamai will be reporting its latest quarter results the end of January. As usual, I plan to listen to the analyst conference and post a summary at www.openicon.com.
You can also check out akamai's web site: www.akamai.com
Friday, November 16, 2007
Akamai Valuation
Akamai (AKAM) continues to be the premier accelerator of Web content and is growing profits rapidly. But its stock price has been all over the place this last year. Some investors will buy at any price when they feel Akamai is their transport to great wealth. Yet this high price-to-earnings stock gets subjected to periodic waves of fear, often driven by rumors of competitors cutting in on the business.
For background on what Akamai does you might try my Understanding Akamai blog entry. For summaries of Akamai's recent quarterly reports and analyst conferences see my main Akamai page.
Your standard data for how unstable a stock's price is, the 52 week high/low, today ended at $59.69 high, $27.75 low. So if you bought at the low this year, then sold at the high, you more than doubled your money. On the other hand that would make you a time traveller or a short-seller, because the low came in September after the high in February.
Looking at a chart of Akamai's price for the past ten years (See NASDAQ's AKAM chart), we see that Akamai IPO'd back in 1999 as one of those "it could be the next Microsoft" stocks. It went to well over $300 per share before reality set in. It went below $1 per share in the summer of 2002. I wish I had bought some then! [I have never owned Akamai stock.] But in 2002 there were lots of technology stock bargains and some of them were making a profit; Akamai was not.
The funny thing about a stock actually making a profit is that instead of being priced on hype the stock starts getting priced more on its earnings. Such stocks may have a sky-high price-to-earnings ratio, as Akamai had back as recently as December 2006, when its P/E ratio was 156.
What I am trying to say here is that different investors price stocks by different criteria. As a result there is no set price where Akamai should be. You should develop criteria for your portfolio, and do your own analysis, to decide whether a stock's price is too high or too low for you. I like to use a conservative pricing model. That minimizes the risk that I am buying an overpriced stock.
Today Akamai stock ended at $36.15. That gives the company a market capitalization (stock price times number of shares outstanding) of a shade under $6 billion.
In the last quarter GAAP (generally accepted accounting principles) earnings for AKAM were $24.3 million. That was up 6% from Q2 and 73% from Q3 2006, so I think we can use the number and still be conservative. Multiply by four and you have an annual net income of $97 million. Using that, dividing into the market capitalization, we get a P/E ratio of about 62, or a return on capital of just 1.6%. Of course you can do better with a CD. Investors are hoping that Akamai keeps growing its earning rapidly, so in 2 or 3 years, even if the stock price is flat, earnings will rise to 5% or more. Okay, what investors really want is for earnings to triple in short order and the P/E ratio to stay high, because then the stock price has tripled in short order (say within 2 years).
There are two main dangers in high P/E stocks. One is that earnings will flatten or even fall, taking away the justification for the high P/E. The other is that as the company becomes larger, investors will become reluctant to project as much earnings growth into the future, and the P/E will decline even with rapid earnings growth. So you had better have a really good reason to buy a stock if it has a high P/E ratio.
Akamai management and its favorite analysts and investors will say that you should not judge the company by GAAP earnings at all. Non-GAAP earnings are far higher. Non-GAAP earnings, in Akamai's case, amount to what they call "normalized net income." In Q3 that was $62.4 million. That is over twice GAAP earnings. If you use that figure, annualizing it as I did above, you get a "normalized" P/E ratio of 24.
Hey, that is cheap for a rapidly growing company. But how real is "normalized?" One test is cash flow. It is not an infallible test, but it is a good one to apply. According to Akamai Q3 cash from operations was $77.4 million, which is even higher than the normalized income.
I think other companies would like to cut in on Akamai's market, but they are trailing its leadership. The market for Web acceleration services is growing rapidly, so even if Akamai just holds onto its market share, it should grow rapidly in the next few years. Risk is not negligible, but it is well-outweighed by opportunity at this point. There is the usual macroeconomic risk that all companies have some exposure to.
I don't think it is crazy to buy Akamai at today's price. If I could see the future more clearly I might call it a bargain for a long term investor. Obviously it is a speculator's favorite, so it is likely to be volatile. Given other opportunities in the market, I think if you did not buy it at under $30 per share in September, you should not be doing more than nibbling at it here.
Remember, diversity rules.
For more data:
www.akamai.com
For background on what Akamai does you might try my Understanding Akamai blog entry. For summaries of Akamai's recent quarterly reports and analyst conferences see my main Akamai page.
Your standard data for how unstable a stock's price is, the 52 week high/low, today ended at $59.69 high, $27.75 low. So if you bought at the low this year, then sold at the high, you more than doubled your money. On the other hand that would make you a time traveller or a short-seller, because the low came in September after the high in February.
Looking at a chart of Akamai's price for the past ten years (See NASDAQ's AKAM chart), we see that Akamai IPO'd back in 1999 as one of those "it could be the next Microsoft" stocks. It went to well over $300 per share before reality set in. It went below $1 per share in the summer of 2002. I wish I had bought some then! [I have never owned Akamai stock.] But in 2002 there were lots of technology stock bargains and some of them were making a profit; Akamai was not.
The funny thing about a stock actually making a profit is that instead of being priced on hype the stock starts getting priced more on its earnings. Such stocks may have a sky-high price-to-earnings ratio, as Akamai had back as recently as December 2006, when its P/E ratio was 156.
What I am trying to say here is that different investors price stocks by different criteria. As a result there is no set price where Akamai should be. You should develop criteria for your portfolio, and do your own analysis, to decide whether a stock's price is too high or too low for you. I like to use a conservative pricing model. That minimizes the risk that I am buying an overpriced stock.
Today Akamai stock ended at $36.15. That gives the company a market capitalization (stock price times number of shares outstanding) of a shade under $6 billion.
In the last quarter GAAP (generally accepted accounting principles) earnings for AKAM were $24.3 million. That was up 6% from Q2 and 73% from Q3 2006, so I think we can use the number and still be conservative. Multiply by four and you have an annual net income of $97 million. Using that, dividing into the market capitalization, we get a P/E ratio of about 62, or a return on capital of just 1.6%. Of course you can do better with a CD. Investors are hoping that Akamai keeps growing its earning rapidly, so in 2 or 3 years, even if the stock price is flat, earnings will rise to 5% or more. Okay, what investors really want is for earnings to triple in short order and the P/E ratio to stay high, because then the stock price has tripled in short order (say within 2 years).
There are two main dangers in high P/E stocks. One is that earnings will flatten or even fall, taking away the justification for the high P/E. The other is that as the company becomes larger, investors will become reluctant to project as much earnings growth into the future, and the P/E will decline even with rapid earnings growth. So you had better have a really good reason to buy a stock if it has a high P/E ratio.
Akamai management and its favorite analysts and investors will say that you should not judge the company by GAAP earnings at all. Non-GAAP earnings are far higher. Non-GAAP earnings, in Akamai's case, amount to what they call "normalized net income." In Q3 that was $62.4 million. That is over twice GAAP earnings. If you use that figure, annualizing it as I did above, you get a "normalized" P/E ratio of 24.
Hey, that is cheap for a rapidly growing company. But how real is "normalized?" One test is cash flow. It is not an infallible test, but it is a good one to apply. According to Akamai Q3 cash from operations was $77.4 million, which is even higher than the normalized income.
I think other companies would like to cut in on Akamai's market, but they are trailing its leadership. The market for Web acceleration services is growing rapidly, so even if Akamai just holds onto its market share, it should grow rapidly in the next few years. Risk is not negligible, but it is well-outweighed by opportunity at this point. There is the usual macroeconomic risk that all companies have some exposure to.
I don't think it is crazy to buy Akamai at today's price. If I could see the future more clearly I might call it a bargain for a long term investor. Obviously it is a speculator's favorite, so it is likely to be volatile. Given other opportunities in the market, I think if you did not buy it at under $30 per share in September, you should not be doing more than nibbling at it here.
Remember, diversity rules.
For more data:
www.akamai.com
Monday, June 18, 2007
Akamai Acceleration?
One reason I don't own stock in Akamai Technologies (AKAM) is that the current price assumes very rapid growth; in other words, if you don't like to make assumptions like that, the stock is not cheap. But the company sports some serious business and technological brains. It is the sort of company that two years later, sometimes, makes you feel foolish for not buying it despite the high P/E ratio. Which stood today at 126 (per Nasdaq). In other words, earnings from the past year come to less than 1% of the value of the stock.
Akamai accelerates data exchanges over the Interet (see my Understanding Akamai). Most people who have paid for a broadband Internet connection expect quick downloads; if a page does not download nearly instantaneously, they are on to something else. For a site financed by ad revenue this is bad. For site that serves up such ads, it is very bad. For a site that hopes to sell people something, slow is a disaster.
According to Akamai, of the top 100 Internet retailers, over two-thirds use Akamai to accelerate their web shopping experiences. Akamai has quantified the value of this acceleration: an 11% increase in revenues after Akamai's acceleration technology has been installed. One customer, Motorcycle USA, saw an over 15% improvement in conversion rates (completed sales once a customer has reached a stage of interest). Revenues increased 30%. Best of all their call center volume dropped, allowing them to save money.
Watching my wife try to shop on the Internet is instructive. She browses, but about one-half the time ends up calling in her order rather than finishing it online. She can spend several minutes of employee time finishing an order. Akamai claims customers typically abandon a site after a 4 second wait. Paying Akamai to decrease the wait pays off.
This particular Akamai product is called Dynamic Site Accelerator. "The Akamai solution not only enables retailers to accelerate their dynamic transactions and interactive content, but has also increased browser to buyer conversion rates and reduces infrastructure costs by offloading traffic from customers' Web infrastructure."
For all that, Akamai's revenues were only $239 million in Q1 2007, with net income of $19 million. Even with a continuing ramp 2007, GAAP earnings are unlikely to top $105 million. At today's $7.9 billion in market capitalization, that gives a forward P/E ratio of 75. If the stock price stays the same for about a year and earnings do grow rapidly, today's price may seem reasonable in June 2008.
You might also want to view my summary of the April 25, 2007 analyst conference covering the results from Q1 2007. Management guided to $610 to $620 million in revenues. Management likes to project "normalized earnings," which is a lot higher than GAAP revenue. For instance in Q1 GAAP earnings were $19 million, but "normalized" earnings were $50.7 million. They are guiding to possibly $215 million normalized net income for the year 2007. If the GAAP to normalized ratio holds, GAAP full year net income will be only $70 million. A nice chunk of change, but not one that justifies the stock price.
So we have a rare current-day example of a great technology company that seems to be overvalued by investors. Akamai has great promise, but in my view it requires a couple of years of revenue and profit growth to justify today's stock price.
Akamai accelerates data exchanges over the Interet (see my Understanding Akamai). Most people who have paid for a broadband Internet connection expect quick downloads; if a page does not download nearly instantaneously, they are on to something else. For a site financed by ad revenue this is bad. For site that serves up such ads, it is very bad. For a site that hopes to sell people something, slow is a disaster.
According to Akamai, of the top 100 Internet retailers, over two-thirds use Akamai to accelerate their web shopping experiences. Akamai has quantified the value of this acceleration: an 11% increase in revenues after Akamai's acceleration technology has been installed. One customer, Motorcycle USA, saw an over 15% improvement in conversion rates (completed sales once a customer has reached a stage of interest). Revenues increased 30%. Best of all their call center volume dropped, allowing them to save money.
Watching my wife try to shop on the Internet is instructive. She browses, but about one-half the time ends up calling in her order rather than finishing it online. She can spend several minutes of employee time finishing an order. Akamai claims customers typically abandon a site after a 4 second wait. Paying Akamai to decrease the wait pays off.
This particular Akamai product is called Dynamic Site Accelerator. "The Akamai solution not only enables retailers to accelerate their dynamic transactions and interactive content, but has also increased browser to buyer conversion rates and reduces infrastructure costs by offloading traffic from customers' Web infrastructure."
For all that, Akamai's revenues were only $239 million in Q1 2007, with net income of $19 million. Even with a continuing ramp 2007, GAAP earnings are unlikely to top $105 million. At today's $7.9 billion in market capitalization, that gives a forward P/E ratio of 75. If the stock price stays the same for about a year and earnings do grow rapidly, today's price may seem reasonable in June 2008.
You might also want to view my summary of the April 25, 2007 analyst conference covering the results from Q1 2007. Management guided to $610 to $620 million in revenues. Management likes to project "normalized earnings," which is a lot higher than GAAP revenue. For instance in Q1 GAAP earnings were $19 million, but "normalized" earnings were $50.7 million. They are guiding to possibly $215 million normalized net income for the year 2007. If the GAAP to normalized ratio holds, GAAP full year net income will be only $70 million. A nice chunk of change, but not one that justifies the stock price.
So we have a rare current-day example of a great technology company that seems to be overvalued by investors. Akamai has great promise, but in my view it requires a couple of years of revenue and profit growth to justify today's stock price.
Monday, February 12, 2007
Understanding Akamai
After the Akamai analyst conference the other day I was pretty enthusiastic and thought I might buy a bit of Akamai (AKAM) stock. The price shot up in after hours trading after the conference, so others were thinking the same thing. Friday the stock dropped 5%, not because of any fundamental change but because the hot money crowd that bought on Thursday found themselves in a generally down tech market.
I realized I did not really understand what Akamai did. Speed up the Internet for their customers, sure, but how?
Apparently Akamai realized that while the Internet is supposed to function automatically, in reality that functionality is not always very efficiently. Simplifying somewhat, when you enter a URL in your browser, say www.YouTube.com, the browser sends out a request for information from the URL. Out in the internet a "name server" translates the YouTube into a number, the IP (Internet Protocol) number of YouTube, and the first router (more than likely made by Cisco) uses its map of the Internet to either (1) forward the request to another router or (2) if it is connected to YouTube, actually forward the request to the YouTube server farm. There the request is processed and sent back to the originating address, again through at least one but usually many routers.
The existence of many routers means there are usually multiple paths between end points. Some paths have more routers in them than others, and routers produce delays, usually very slight ones. But an overloaded router can be a problem.
Akamai has an array of servers that monitor the state of Internet traffic. They use that information to do two things for their customers. One is that they are able to optimize routes - choose the fastest routes for their customers. The fastest route may shift from second to second or on any other time scales. The other is they allow content to be held near the end points that are frequently requesting it. Thus if a particular YouTube video is being watched by large numbers of people on a given day, instead of going to the YouTube servers every time a request is made, the request can be answered from a cache that is time-wise closer to the end user. Akamai claims to handle 20% of Internet traffic.
Akamai's servers, in addition to monitoring Web traffic, can hold its customers content and server it up in an efficient manner.
This is important to Akamai's customers because there is little point to serving up content if the end consumers have gotten bored and clicked onto something new while waiting for all those routers to get their act in gear.
It is a great company with good ideas. But I have decided not to buy the shares. Why? By my criteria (but obviously not by some other investors) the price of the stock is too high. I think of it in terms of market capitalization, which for AKAM ended today near $8.6 billion. The company is predicting that revenues for 2007 would total $610 to $625 million, with adjusted (non-GAAP) net income around $200 million. Now that is a great model, getting almost 1/3 profit out of your revenues. But the high market cap to sales and market cap to profits ratios are too rich for my portfolio, given other choices available. I have seen too many companies on upward trajectories level off their growth rates to draw a straight line several years out assuming these ratios will remain this high. Three years of continued high growth could prove me wrong.
I realized I did not really understand what Akamai did. Speed up the Internet for their customers, sure, but how?
Apparently Akamai realized that while the Internet is supposed to function automatically, in reality that functionality is not always very efficiently. Simplifying somewhat, when you enter a URL in your browser, say www.YouTube.com, the browser sends out a request for information from the URL. Out in the internet a "name server" translates the YouTube into a number, the IP (Internet Protocol) number of YouTube, and the first router (more than likely made by Cisco) uses its map of the Internet to either (1) forward the request to another router or (2) if it is connected to YouTube, actually forward the request to the YouTube server farm. There the request is processed and sent back to the originating address, again through at least one but usually many routers.
The existence of many routers means there are usually multiple paths between end points. Some paths have more routers in them than others, and routers produce delays, usually very slight ones. But an overloaded router can be a problem.
Akamai has an array of servers that monitor the state of Internet traffic. They use that information to do two things for their customers. One is that they are able to optimize routes - choose the fastest routes for their customers. The fastest route may shift from second to second or on any other time scales. The other is they allow content to be held near the end points that are frequently requesting it. Thus if a particular YouTube video is being watched by large numbers of people on a given day, instead of going to the YouTube servers every time a request is made, the request can be answered from a cache that is time-wise closer to the end user. Akamai claims to handle 20% of Internet traffic.
Akamai's servers, in addition to monitoring Web traffic, can hold its customers content and server it up in an efficient manner.
This is important to Akamai's customers because there is little point to serving up content if the end consumers have gotten bored and clicked onto something new while waiting for all those routers to get their act in gear.
It is a great company with good ideas. But I have decided not to buy the shares. Why? By my criteria (but obviously not by some other investors) the price of the stock is too high. I think of it in terms of market capitalization, which for AKAM ended today near $8.6 billion. The company is predicting that revenues for 2007 would total $610 to $625 million, with adjusted (non-GAAP) net income around $200 million. Now that is a great model, getting almost 1/3 profit out of your revenues. But the high market cap to sales and market cap to profits ratios are too rich for my portfolio, given other choices available. I have seen too many companies on upward trajectories level off their growth rates to draw a straight line several years out assuming these ratios will remain this high. Three years of continued high growth could prove me wrong.
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