The stock of Akamai Technologies (NAS:AKAM, 30-year Financials) gives every indication of being modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $116.95 per share and the market cap of $19.1 billion, Akamai Technologies stock appears to be modestly overvalued. GF Value for Akamai Technologies is shown in the chart below.
Because Akamai Technologies is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 10.3% over the past three years and is estimated to grow 8.39% annually over the next three to five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company’s financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Akamai Technologies has a cash-to-debt ratio of 0.46, which which ranks worse than 83% of the companies in Software industry. The overall financial strength of Akamai Technologies is 6 out of 10, which indicates that the financial strength of Akamai Technologies is fair. This is the debt and cash of Akamai Technologies over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Akamai Technologies has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $3.3 billion and earnings of $3.55 a share. Its operating margin of 22.23% better than 90% of the companies in Software industry. Overall, GuruFocus ranks Akamai Technologies’s profitability as strong. This is the revenue and net income of Akamai Technologies over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Akamai Technologies is 10.3%, which ranks in the middle range of the companies in Software industry. The 3-year average EBITDA growth is 19.9%, which ranks in the middle range of the companies in Software industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Akamai Technologies’s return on invested capital is 11.87, and its cost of capital is 4.74. The historical ROIC vs WACC comparison of Akamai Technologies is shown below:
In summary, The stock of Akamai Technologies (NAS:AKAM, 30-year Financials) is estimated to be modestly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Software industry. To learn more about Akamai Technologies stock, you can check out its 30-year Financials here.
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