Akamai Stock Crushed, But Outlook Still Attractive

After reporting in-line earnings, streaming video content provider Akamai (AKAM) got slammed to the tune of 18% yesterday to $38.

Akamai is one of those high multiple growth stocks that everyone expects to beat numbers every quarter. After meeting expectations and guiding in-line for the third quarter, analysts are downgrading and investors are fleeing.

I think the sell-off is overdone and I am initiating some positions this morning. The company's fundamentals remain strong as online video has years of growth ahead of it. All of the sudden, the stock trades at only 23 times 2008 earnings. For a growth stock like AKAM, I think that is a bargain. Many investors will worry about margin pressures and such since it appears they are giving price discounts for long-term contracts, but most likely the company is just being conservative.

Given the market they serve and their leadership position, I think a 23 forward year multiple for the stock is pretty cheap. These are the types of earnings season sell-offs that I often like to play on the long side. AKAM shares weren't worth the price at their highs ($57), but now that they are down 35% to $38, I think that falls into "growth at a reasonable price" territory.

For further research see: Akamai Technologies Q2 2007 Earnings Call Transcript

Full Disclosure: Author is long shares of AKAM at the time of writing.

AKAM 1-yr chart:

Comments

[cjw:]

That's what I thought at $45. Discount of 20% from the $57 high... Whoops!

Perhaps this time you're right, or perhaps we'll all be talking about the 50% discount next quarter. :)

2007 Jul 27 03:04 PM

[David Lentz:]

Yes, it all depends upon whether this drop in the markets is a "correction", or a "CORRECTION".

It should be noted that IF the driving event in all this is the sub-prime debt markets, there are a lot of turns left in that particular screw, as each period of ARM adjustments will bring a new crop of home-owners pushed into default, adding more to the supply side of the housing markets, and driving demand lower by the sheer size of the rising tide of supply. From thence the apprehension concerning risk spreads, and rates rise accordingly. Local property tax revenues shrink, and other taxes are raised to compensate. Dominos fall everywhere. But fear is a greater mover of markets than rates.

Please review the day-to-day history of any tech stock (that had positive earnings) from March 2000 to June 2003. Observe how the PE collapses as the enthusiasm drains out of the markets.

A useful (though not precise) methodology is to plot the PE ratio vs time, and note the historic low ebbs. That's generally an indicator that's in the ballpark of when it's prudent to buy in. Noting the decline from the highs is not. Looking at just the past 2 years of AKAM PE data, it would seem that when the trailing PE is down to 23, that's a great place to buy in at -- providing the company has the ability to continue to generate earnings in difficult times. If you look at the PE history for AKAM, it's spent more time closer to 23 than 83. The forward PE is based on some measure of wishful thinking, occasionally projecting a bull market economy into a bear market future.

2007 Jul 28 11:58 AM