September Idea of the Month: Akamai = Clever … and maybe “Cheap” too

By Travis Johnson, Stock Gumshoe, September 18, 2009

Akamai is a Hawaiian word that means “smart” or “clever” — not an accident for an MIT-born firm that has been supplying the business backbone to parts of the web for many years, even though most people (myself included) don’t really understand everything that they do. I’ve owned Akamai a couple times over the years (I don’t currently), and I think we’re now getting to the point where fears of a price war and fears of new competitors are again making the shares inexpensive.

There’s some risk here, of course, but at the current valuations I think it’s reasonable to buy AKAM and hold on for an economic recovery, maybe squint a little as the industry potentially goes through a price war (though the prospects for this may be exaggerated), and look for the blue skies beyond that. The shares are at about $18 right now, with the assumption that earnings will remain steady over the next year — so we have a PE ratio of just about 12 based on both the trailing twelve months and on prospective 2010 normalized earnings (they’re close to the same) for the company that is the largest pure-play on the content delivery network business and a dominant, high margin leader with ample resources.

If you’re someone who relies on stop-losses, I think a 25-30% stop loss on these shares is reasonable but I’d be very careful around the next earnings release — AKAM can certainly be very volatile on earnings, as we saw at their last release when the shares dropped from $20 to $16 and snapped back almost immediately to $18, so I’d be careful about going into earnings if your stop loss is much tighter than that. The next earnings release will be late in October.

That’s the thumbnail — how about some details?

Akamai is primarily a provider of distributed computing — their key service is their content delivery network, which relies on about 50,000 servers distributed in 1,500+ locations around the world (often in your ISP’s data center), but the key is their ability to direct web traffic around bottlenecks and distribute data from the edge of the network, instead of forcing everything to go through congested internet hubs or cross large distances. They use those servers and dedicated connections and proprietary software and systems to deliver your mission-critical or high bandwidth or large ...

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