Akamai Has Become Too Attractive To Pass Up

After witnessing the recent market volatility, I vowed to bide my time until my next pick and watch how everything would shake out. However, the market’s capricious whims have knocked down one of my favorite companies, Akamai (Nasdaq: AKAM), to relatively bargain levels. Two years ago, I bought into the company at 13 and sold at 17, only to kick myself as I watched it soar to near 60. Although I expect the short-term swings to continue, I believe that the market is offering us another chance to jump on Akamai for the long-term.

Akamai provides a distributed computing platform for global internet content and application delivery. In other words, Akamai allows content providers like Apple and Yahoo! seamlessly and quickly to transmit audio, video and graphics to internet users around the world. It’s obvious to any person with a modicum of technological literacy (and you qualify by reading this right now) that internet content delivery is a HUGE secular growth trend. Maybe the biggest. To distribute more content, companies need increasingly to leverage content delivery networks [CDNs]. And as was stated in a recent Business 2.0 blog entry, Akamai is the Google of CDNs, controlling an estimated 54% of the market.

Earlier this year, the company was named Business 2.0’s #1 fastest growing tech company. Recent earnings indicated that the hypergrowth is set to continue, as Akamai announced full-year guidance that represents 44% YoY revenue growth and a 45% jump in profits. In return for meeting expectations and reaffirming this impressive guidance, the market rewarded Akamai’s shares with a 30% haircut.

Why? Minyanville has a great article breaking down Merrill Lynch’s (poor) reasons for issuing a dour view on the company following earnings. From what I can gather, the bottom line is that Wall Street is worried that others are catching on to Akamai’s game. Upstart competitors Limelight Networks, Internap, and EdgeCast have recently received glowing press and funding from big names. But I don’t look at the new entrants as a bad thing; it merely reinforces the fact that this is a remarkably high-growth industry. There will certainly be room for multiple players, but nobody has the experience or financial backing to go head-to-head with Akamai, the 800-pound gorilla. Akamai has spent hundreds of millions of dollars building out its world-class network and is currently engaged in a $60M capacity expansion. At its most basic, content distribution is about pure bandwidth power, and no competitors can come close to matching Akamai.

Trading at a 2008 PE of 21 on estimated growth of over 30%, I believe that Akamai shares have become too attractive to pass up. Regardless of the short-term gyrations, I think 12-24 months from now, this will be one that we’ll be very glad we owned.

Disclosure: SmartGuyAB is long AKAM

Comments

[schleef:]

Net -- I added to my Akamai holdings , which I began 3-4 years ago at a price of $1. Sly Jack (30 yrs in hi-tech)

2007 Aug 09 12:12 PM