Akamai Technologies (AKAM), Internet performance enhancement firm, is trading at a higher valuation since the last time I wrote about the company; since that time, new information is being factored into the valuation. In this report, I add to and update my previous analysis.
There are several factors impacting the supply and demand for Akamai's solutions.
On the demand side, the positives for Akamai are increasing website complexity, cloud computing, and Internet video; the negatives are mobile Internet usage and pricing pressure.
It is not clear that Akamai has a competitive advantage in mobile Internet performance enhancement.
On the supply side, Akamai faces competition from Cisco (CSCO) and the telecoms, who could provide alternatives.
Right now, Akamai has a competitive advantage that is reflected in excellent financial performance and a premium valuation.
Financial Performance & Valuations
Following the release of second quarter results, I updated my financial performance model and valuations.
I'm tightening my fiscal 2013 revenue range to $1.55 to $1.62 billion with an operating margin in the 25.5% to 26.6% range and a net profit margin range of 16.9% to 18.9%.
I expect revenue growth to continue to come from new customers and increasing sales to existing customers during the remainder of 2013.
Lower bandwidth cost per unit is offsetting higher total bandwidth cost, which is increasing profitability; long term, this result should be transient.
Longer term, I expect 2015 revenue of $1.725 billion, which would be a 7.88 CAGR from 2012.
The market is pricing in a substantial amount of earnings growth into the share price of Akamai: Almost 60% of the share price is attributable to earnings growth. I view that as too high of a price for earnings growth.
Relative to its five-year average multiplier model valuations, Akamai is overvalued: The intrinsic value using this model is $44.91, which means Akamai is 16% overvalued.
On a time-series basis, Akamai is overvalued: The valuations are near a peak.
Consequently, using all three valuation models, Akamai is overvalued, but at what level should I accumulate shares?
Previously, I modeled a top at $48 per share with a buy zone at $36 to $41 per share but now, I'm modeling the share price topping at $57.50 and declining at least 15%, which could be a buying opportunity. Using this model, $43 to $49 per share would be the buy zone.
The 52-week price target is below the current share price: The 52-week price target is $48.19; this means that Akamai's share price is well above trend.
Since March 2009, the compound monthly growth rate is 1.8%, which is an excellent but unsustainable growth rate.
The monthly return distribution shows favorable characteristics: the skewness is positive and the tails are not fat.
In conclusion, from a portfolio management and valuation perspective, I'm not going to accumulate shares of Akamai at this level; I will use a substantial decline in the valuations to accumulate shares.