Akamai Technologies: P/E Multiple Too Rich For 12% Growth

Mar.19.12 | About: Akamai Technologies, (AKAM)

Akamai's (NASDAQ:AKAM) stock has been on a roll as it has nearly doubled over the past 6 months. The valuation metrics are very mixed on the stock as one suggests that SNDK is undervalued and the other two suggest that it is overvalued. However, growth is only projected in the 12-13% range. In 2012, analysts expect the company to increase revenues by 13% and 12% in 2013. A stock with these kind of growth prospects does not deserve the rich multiples the market is giving AKAM. Therefore, I suggest that investors stay away from AKAM and look elsewhere in the tech space. Below is an in depth look at the valuation metrics.

Valuation: Akamai's trailing 5 year valuation metrics suggest that the stock is undervalued as all of the metrics are below their respective 5 year averages. Akamai's current P/B ratio is 3.1 and it has averaged 3.3 over the past 5 years with a high of 6.9 and low of 1.6. Akamai's current P/S ratio is 5.7 and it has averaged 7 over the past 5 years with a high of 16.9 and low of 3.2. Akamai's current P/E ratio is 34.9 and it has averaged 37.4 over the past 2 years with a high of 61.8 and low of 19.1.

Price Target: The consensus price target for the analysts who follow Akamai is $37. That is downside of 2% from today's stock price of $37.36 and suggests that the stock is overvalued at these levels. This also suggests that the stock has limited upside and should be avoided at its current stock price.

Forward Valuation: Akamai is currently trading at about $37 a share with analysts expecting EPS of $1.85 next year, an earnings increase of 12% y/y, for a forward P/E ratio of 20.2. Taking a look at other tech companies will give us a better idea of the stock's relative valuation. Intuit (NASDAQ:INTU) is currently trading at about $60 a share with analysts expecting EPS of $3.35 next year, an earnings increase of 13% y/y, for a forward P/E ratio of 18.

Adobe Systems (NASDAQ:ADBE) is currently trading at about $34 a share with analysts expecting EPS of $2.66 next year, an earnings increase of 10% y/y, for a forward P/E ratio of 12.7. Autodesk (NASDAQ:ADSK) is currently trading at about $41 a share with analysts expecting EPS of $2.41 next year, an earnings increase of 18% y/y, for a forward P/E ratio of 17. The mean forward P/E of Akamai's competitors is 15.9 which suggests that Akamai is overvalued relative to its publically traded competitors.

Earnings Estimates: Akamai has beat EPS estimates 3 times in the past 4 quarters. The company's EPS figures have come in between 1 cent and 5 cents from consensus estimates or about 2.8% to 12.5% from analyst estimates. The company has reported earnings that have differed from analyst estimates by a fair margin which suggests that the stock may experience upside from earnings surprises.

Price Action: Akamai is up 2.4% over the past year, underperforming the S&P 500, which is up 12.5%. Looking at the technicals, the stock is currently above its 50 day moving average, which sits at $34.89 and above its 200 day moving average, which sits at $28.47.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.