For Investors Thinking that the Internet Would Continue Growing

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Sep 08, 2014

In this article, let's take a look at Akamai Technologies Inc. (AKAM, Financial), a $10.96 billion market cap company, which is a company that develops and deploys solutions designed to accelerate, improve and secure the delivery of Internet content and applications.

Computing platform

The company continues to invest into security solutions in order to generate profits. Working with the largest independent network of content delivery, the company serves end users in an effective way. It can move about 130,000 /140,000 servers inside almost 1,100 networks in 87 countries. These numbers are really attractive and show the company´s global reach.

The company focuses on advances in technologies such as advanced routing, load balancing and data collection. We see this as competitive advantages the company will continue developing.

Moreover, it is highly probable that internet usage would expand due to the growth in traffic in the upcoming years.

Acquisitions

Recent acquisitions have helped to Akamai's base of technologies related to its areas of focus. We believe those acquisitions should contribute to revenue growth.

Main risks

What we think is a major risk is that telecom providers have been trying to have their own content delivery networks. At the end this will lead to price declines. Furthermore, we must say that Internet traffic will be driven by mobile users. Finally, network providers could cut off the collocation of its servers deep in their networks.

Revenues, Margins and Profitability

Looking at profitability, revenue growth by 25.89% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.40 vs $0.32). During the past fiscal year, the company increased its bottom line. It earned $1.61 versus $1.13 in the prior year. This year, Wall Street expects an improvement in earnings ($2.35 versus $1.61). Also, the net income increased by 17.8% to $72.89 million, as well as net operating cash flow to $200.22 million.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
AKAM Akamai Technologies 11.16
BIDU Baidu Inc. 27.38
P Pandora Media Inc. -38.54
YHOO Yahoo! Inc 10.45
LNKD LinkedIn Corp. 1.02
 Industry Median 6.77

The company has a current ROE of 11.16% which is higher than the industry median. Also, it is higher than the one exhibit by Pandora Media (P, Financial), Yahoo! Inc. (YHOO, Financial) and LinkedIn Corp. (LNKD, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Baidu Inc. (BIDU, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

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Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 36.6x, trading at a discount compared to an average of 51.1x for the industry. To use another metric, its price-to-book ratio of 3.95x indicates a premium versus the industry average of 3.14x while the price-to-sales ratio of 6.35x is above the industry average of 2.4x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $34,252, which represents a 27.9% compound annual growth rate (CAGR).

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Final comment

The tech industry is characterized by a rapid change, where Akamai must keep innovating to retain its customer base. These technology changes may increase the opportunities for new entrants.

Akamai is the largest provider of Internet CDN solutions while many telecom providers are selling their own CDN solutions. This could make that the intangible value if Akamai's products get hurt.

The PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.

Hedge fund gurus like John Hussman (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned