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

Akamai was one of the survivors of the original Internet bubble, and for years was characterized by the volatility of its stock price. Specializing in Internet content acceleration, over the years it became the IBM of this field. Money was being made, and so there was intense competition, and shorts sometimes heralded the fall of Akamai. AKAM always stayed a footstep or two in front of its competition. More importantly, it branched out.

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

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 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, 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/