Akamai Technologies, Inc. (NASDAQ:AKAM) provides services for accelerating and improving the delivery of content and applications over the Internet from live and on-demand streaming videos to conventional content on web pages to tools that help people transact business.
The Cambridge-based Akamai has some interesting products in the pipeline, including a project with Qualcomm aimed at improving download speeds. Also, Akamai won a deal with NBC to improve the delivery, over the Internet, of the winter Olympic games.
There are concerns about the slowing growth rate and pricing pressure. But right now the fundamentals of Akamai are bullish.
- Akamai is working with Qualcomm on a new class of home gateway that would cache content within the home for faster access.
- NBC will use Akamai video streaming delivery for Olympic coverage.
- Verizon acquired Akamai's CDN rival EdgeCast, which could unravel a CDN partnership between Verizon and Akamai.
- Akamai CEO Tom Leighton is accumulating shares of Akamai.
- There are rumors that AT&T is interested in acquiring Akamai, but deals of this size are rare.
Akamai Technologies, Inc. provides services for accelerating and improving the delivery of content and applications over the Internet from live and on-demand streaming videos to conventional content on web pages to tools that help people transact business.
The organization receives most of its revenues from Media Delivery Solutions and Performance and Security Solutions. Total revenue from Services and Support Solutions is trending higher. Media Delivery Solutions and Performance and Security Solutions grew sales in the mid-to-high teens during the first nine months of 2013.
Akamai is reportedly facing pricing pressure. But gross and operating margins expanded during the first nine months of fiscal 2013. The operating margin increased from 22% to 26%, and the net profit margin increased from 13.6% to 18.6%. The net profit margin in the quarter ending in September is higher than the margin during the first nine months of 2013. The organization's net profit margin is in the mid-to-high teens consistently.
At the end of the calendar third quarter, the cash ratio was 1.99 with a current ratio of 3.20. The financial leverage ratio was 1.13, and there was no debt reported on the balance sheet. Akamai was carrying excess liquidity with a cash balance $566 million. I think management can increase the capital distributions to shareholders.
Cash flow from operations is trending higher. Free cash flow during the trailing twelve months was $356 million. FCF increased 15% during fiscal 2012 and 29% during fiscal 2011. In the next couple of years, Akamai could be returning $200M of capital to shareholders, annually.
The growth rate has slowed recently. But over the past 3-years, revenues grew at an average rate of 16.9%, which is below the 10-year average of 25.2%. Akamai should be viewed as a growth company with adequate liquidity, and solid profitability. I expect Akamai to continue to return excess capital to shareholders in the coming years. Also, the organization is likely to generate a return on equity above my cost of equity during the next 52 weeks.
- The share price is likely to remain volatile and investors could lose a portion or all of their investment.
- Investors should judge the suitability of an investment in Akamai in light of their own unique circumstances.
- A decline the global economic growth rate and/or a decline in the pace of economic growth in the United States could adversely impact the results of operations and the share price.
- The technology industry is characterized by rapid technological change, which could materially adversely impact the results of operations.
- Competition in product development and pricing could adversely impact performance.
- Incorrect forecasts of customer demand could adversely impact the results of operations.
- Higher interest rates may reduce demand for Akamai's offerings and negatively impact the results of operations and the share price.
This section does not discuss all risks related to an investment in Akamai.
Valuation & Portfolio Management
From a technical perspective, shares of Akamai are in an intermediate-term uptrend as part of a primary-degree uptrend. This follows an intermediate term decline. Simply put, the technicals are bullish.
There are some diversification benefits to investing in Akamai. The correlation of Akamai and the S&P 500 (NYSEARCA:SPY) since 2009 is 0.67. Since 2011, the correlation is 0.74, and since 2013, the correlation is 0.66. Akamai is strongly correlated with the S&P 500, but there are diversification benefits. Given the high correlations, I will assume that at the very least the relationship since 2009 is statistically significant.
How much of the variation of the share price of Akamai is explained by the variation of the share price of the S&P 500. Since 2009, 45.6% of the variation is explained by the variation of the S&P 500. Since 2011, 54.7% of the variation is explained by the variation of the S&P 500, and 43.8% is explained by the variation of the S&P 500 since 2013. A substantial amount of the variation of the share price of Akamai is explained by the variation of the market; thus, forecasts for the market should be included in forecasts for Akamai.
I utilize 3-month, 6-month, and 12-month share price forecasts. The forecasts are for share prices of $46.74, $47.85, and $50.07. The current share price is $48.58, which means that Akamai is trading above trend.
How likely is Akamai to outperform the broader market? Using my proprietary model, I think it is somewhat likely that Akamai will outperform the broader market. I view the chance of outperformance as being about 60%.
Given the fundamentals of the company, Akamai should trade at a premium to the market. Akamai trades at 3.4 times book value while the market trades at 2.6 times book value. Akamai is at worst fairly valued, but the share price can go higher as the financial performance provides a tailwind.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.