David Lentz

AT&T's Threat to Akamai Overblown

It is also instructive to look at AT&T's forays into internet TV over DSL (it's U-verse offering has taken enormously longer than projected to get rolling, amid a "universe" of problems and glitches), and even their DSL presence itself (which is significantly less than 100% coverage -- I'm not talking customer adoption rates, I'm talking just the mere availability of DSL -- within it's customer spaces, and is driving a lot of cable internet connection by virtue of its absence). And then there's also the glacial pace at which ATT is upgrading its cellular networks from EDGE to HSDPA.

ATT can thank it's luck stars that they were able to work a deal with Apple locking in a measure of iPhone exclusivity, as if Verizon (for instance) had been willing to pay the price that Apple demanded and were offering the iPhone instead of ATT, the Cingular subscriber base would no longer be the largest in the market.

The only thing that keeps ATT afloat is its protected utility monopoly status -- if we ever did have actual competition in our phone markets, the spawn of Ma Bell would quickly wither and die.

The quick little niche-growers in the economic ecology have little to fear from the corporate dinosaurs. The biggest threat to Akamai is that ATT will opt to buy its way into the CDN business by purchasing Akamai at some juicy multiple of the current stock price. And that's not such a problem for the AKAM stockholders.

Akamai Stock Crushed, But Outlook Still Attractive

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.