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, Charles Stross
Akamai (NASDAQ:AKAM) 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 (NYSE: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 year-over-year 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 Jan. 1 and 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 P/E 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 P/E is 31.1 trailing, which is higher than most tech stocks at the moment. But that's easily justified by a history of growth and the outlook for 2013.
For the latest reported quarter, Q4 2012 ending Dec. 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 a 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 (NYSE: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. People 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 AKAM. I will not trade the stock for one week following the publication of this article.