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Why I Feel Bullish on Akamai
Posted by: Damian Illia (IP Logged)
Date: April 4, 2014 05:25PM
Akamai Technologies Inc. (AKAM) is engaged in providing content delivery and cloud infrastructure services for accelerating and improving the delivery of content and applications over the Internet.
In this article, let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment.
Acquisitions & Partnerships
Recent acquisitions have bolstered the company's base of technologies related to its primary areas of focus, playing an important role in Akamai´s growth. We are talking about the acquisitions of Cotendo, Blaze, Fast Soft and Verivue in 2012 have expanded its customer base, increased its global presence and extended its product portfolio.
Recently, the firm acquired cyber security software developer Prolexic Technologies Inc., a privately held company based in Hollywood, Fla., that provides cloud-based security solutions for protecting data centers and enterprise IP applications from distributed denial of service (DDOS) attacks.
Finally, the company´s partnerships with AT&T, Orange, Cisco, IBM, Turk Telecom, Swiss telecom and KT are expected to expand its customer base and addressable market going forward.
Major Growth Driver
Cloud computing technologies will be a major growth driver for the company in the future. The company´s cloud optimization solutions help organizations improve performance, increase availability and enhance the security of applications and key web assets delivered from the data-centers to the end user.
Dividend & Share Repurchases
Last year the board of directors has authorized a new share repurchase program worth $750 million. The initiative is effective from this past Oct. 16 through Dec. 31, 2016.
The firm is currently Zacks Rank # 2 – Buy, and it also has a longer-term recommendation of “Neutral.” For investors looking for a better Zacks Rank, there is no other option.
In terms of valuation, the stock sells at a trailing P/E of 34.9x, trading at a premium compared to an average of 23.2x for the industry. To use another metric, its price-to-book ratio of 3.9x indicates a premium versus the industry average of 2.51x and the price-to-sales ratio of 6.6x is above the industry average of 2x. All these metrics indicate that the stock is relatively overvalued.
Akamai reported strong fourth quarter results beating the Zacks Consensus Estimate. Earnings per share (EPS) increased by 15.8% in the most recent quarter compared to the same quarter a year ago (from $0.38 to $0.44). In the next graph we can see that it has demonstrated an interesting positive trend in the last seven years, and we include the stock price because EPS often lead the stock price movement. The last year, the stock's share price has jumped by 65.27%, exceeding by far the S&P 500 performance.
Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has increased from the same quarter one year prior. This is a clear sign of strength within the company.
Let´s compare the current ratio with the peer group in the next table:
The company has a current ratio of 11.8% which is higher than the one registered by Facebook (FB), InterXion Holding N.V. (INXN) and AOL Inc. (AOL). But for investors looking for a higher ROE, Tencent Holdings Ltd. (TCEHY) could be the option.
As outlined in this article, we see acquisitions contributing to significant growth, and expect AKAM to continue with these successful transactions. Moreover, we think Prolexic will help the firm to solidify its footprint in the distributed denial of service (DDOS) cyber solution market. Finally, share repurchases and Zacks Rank make me feel bullish about this company.
I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in fourth quarter 2013. Gurus like Ray Dalio (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) have also invested in it.
Disclosure: Damian Illia holds no position in any stocks mentioned.
Guru Discussed: Joel Greenblatt: Current Portfolio, Stock Picks
Stocks Discussed: AKAM, FB, INXN, TCEHY, AOL,