Akamai Technologies, Inc. (AKAM)

Akamai is now facing the biggest competitors it has ever faced in its 10 years of existence. The MIT buzz that they their math is somehow better just isn't true any longer. 10 years has passed since they started and others have had plenty of time to write code and catch up. The CDN math is complicated but it is not Einstein level. Content delivery is now a commodity business using commodity products. They are now going head to head with competitors that manage far bigger, more complex global networks that have greater visibility into the Internet traffic flows for static http objects and streaming and hosted internet video. Both Level 3 and ATT have recently deployed new working content management networks that are in place and will be getting customer wins happily with prices that are half of what Akamai charges. The difference is that they are both running global networks alongside the CDNs which Akamai does not. Moreover, they have deeper pockets to invest in the new faster, emerging hardware.

A little history is in order: Akamai emerged as the early content player in the late 1990s during the time when the majority of users were on dial up. Their distributed server architecture made sense at that time because there were acknowledged problems and congestion at most ISP peering sites. Since then these backbone ISPs and peering sites have now purchased routers with gigabit and 10 gigabit network interfaces that have 1000 times more performance of the Cisco 7500 routers of that era (which were 10 and 100-megabit (.1 gigabit) interfaces. The 7500 were pre-gigabit and pre-10gigabit network interfaces at that time. Many backbone providers have purchased Cisco GSRs and CRS-1 routers, which will scale to 90 terabits or 90,000 gigabits in a multi-rack chassis. The network interfaces used on core routers will be running at 100gigabits by late this year (See announcements on www.nxtcommshow.com). As an example, the new edge Cisco ASR 1000 Quantum flow router that replaces the older 7200 series has the performance equivalent of 160 7200s. The core routers are thousands of times this.

SEE (http://www.networkcomputing.com/immersion/virtualization/showArticle.jhtml?articleID=206901409)

"Leveraging the 40-core Quantum flow processor (announced by Cisco in February and which can process 160 simultaneous threads at a whopping 49 billion transactions per second), the ASR supports the common services found on Cisco's routers, including stateful firewalling, QoS, VPN, and multicast."

SEE( http://telephonyonline.com/access/news/cisco-edge-router-0304/ )

"In terms of performance, said Suraj Shetty, Cisco’s senior director of worldwide service provider marketing, the new router is equivalent to 160 of Cisco’s popular 7200s"

Akamai gets bandwidth and colocation space from other providers but does not own the fiber or networks it runs over. Most of their IP address blocks are from their colocation providers. They play around with DNS CNAME functions and have a large network of caching servers that are colocated around the Internet. These servers are getting cheaper all the time and using VMware, it is now possible to replicate their server architectures for a quarter (1/4) of what the cost is on their balance sheet all with faster quad processors which are much faster than some of the older legacy Akamai servers. Nowhere does Akamai breakout in detail the generation of the servers they have by number or type. It is possible for an edge customer to be stuck behind an aging, slower Akamai server, and have problems getting the page objects and sites they serve up.

Akamai has an amazing NOC that makes for a great dog and pony show. However, the fragility of their CDN architecture, which rests on the unsecure DNS protocol, makes them very vulnerable to attacks. There have been attacks (search on Akamai problems) which have affected major customers. DNSSEC would help on a private backbone but really the core argument is that the CDN world is changing and changing very fast. CDNs play nicely with the Doubleclicks of the world for web advertising but one cannot expect that to last much longer since Google now owns it and could announce a CDN at any time on their deployment of global servers and suddenly there are three majors CDNs out there.

They advertise the fact that the US government uses them for content delivery does not validate a new customer’s purchase decision. Both Level 3 and ATT won the multibillion NETWORX US government telecommunications bids. (http://www.gsa.gov/Portal/gsa/ep/contentView.do?pageTypeId=8199&channelId=-13259&P=&contentId=22827&contentType=GSA_BASIC)

AND

( http://www.gsa.gov/Portal/gsa/ep/contentView.do?pageTypeId=8199&channelId=-13259&P=&contentId=23096&contentType=GSA_BASIC)

You can bet sure that some of the government business that is going to Akamai may go away. And why does this “bright” management give their customer list away on their website to AT&T and Level 3? These competitors now have the real customer lists to target for their new CDNs and just have to offer a lower price until Akamai misses their numbers and the stock price drops like a rock. Employees will exit because the options drop when that happens.

Lastly do not forget the off-the-shelf distributed server load balancers are getting much faster and better for enterprise and ISP customers that can use them as cheaper replacements to any companies CDN. See the recent announcements by A10 networks ( http://www.a10networks.com/) for its new product line of distributed content devices that are selling like hotcakes.

To summarize, I do not own Akamai stock. But even if you don't believe a word of what I've said so far, I believe the multiple they are commanding is too high given that they own thousands of commodity PCs that should be written down (write off 4 or 5 billion of assets) and no network. Remember the Internet will still keep going and run properly if they go out of business and will probably be faster because the slower caching servers will no longer be in the way. Be wary of this stock.

This thing is a steamroller. It's got the name brand moat, the patent moat, an infrastructure moat...it has clients jumping on board so you know it's an effective product...and the quarterly reports just seem to keep rolling in with good news. What's not to like?

Akamai Technologies provides services for the delivery of content and business processes over the internet. Based on its technology platform, EdgePlatform, its offerings include solutions for content and application delivery, application performance services, on demand, managed services and business performance management services. The users of its products and services are business houses, government agencies and other enterprises. Revenues are earned from sale of services and software products.

Akamai has a portfolio of content delivery network (CDN) and application delivery network (ADN), consisting of over 20,000 servers deployed in 70 countries to optimize routing and delivery of internet content globally. CDN improves performance and has lower cost for website operators by caching the most commonly-requested and most data-intensive elements of web pages on servers close to the end users. It dominates the CDN market with 70% market share. The recent acquisition of Nine Systems will broaden its total offering in the rich media production and publishing content framework and enable its media customers to grow more rapidly.

More and more enterprises are incorporating video and interactive graphics to enhance user’s experience as more people access internet through broadband connection. Thus these business enterprises are looking for an efficient provider of high quality services as their business models are rapidly shifting online. Proliferation of multimedia web content should drive in demand for Akamai’s CDN services. Its new product called Dynamic Site Solutions, designed for B2C websites is well accepted by its customers as it provides five times more gains than original web infrastructure. With a healthy balance sheet and modest revenue and earnings guidance, this stock is a good pick for long-term investors.

This stock tracks the growth of the internet. Need I say more?

I'm late to this party on this one, but the basic case for long term success remains intact. PE of 15 seems reasonably cheap for this behind the scenes internet star. Will dip as the market goes through it's "correction" gyrations, but AKAM will bounce back and continue to ride the internet wave. Going to add it now, since I'm not smart enough to time the market.

Akamai has built an amazing business that's not going away any time soon. It's positioned to grow as the delivery of content over the internet grows . . . Nice position to be in, eh?

The key to Akamai’s success is its de-centralized computer network (duplicates client websites to servers in closer proximity to users) - improves the performance/speed of the client's websites. This is especially important to data intensive applications such as video. Akamai operates the world’s largest distributed computing network with 48,000 servers in 1,000 networks across 70 countries.

Duplication of this network by competitors is a threat as server costs have decreased, but Akamai is the respected leader delivering 15-20% of the world’s non-email web traffic. Clients include 85 of the top 100 online retailers; 6 of top 7 computer companies, top advertising delvery companies, 9 of top 10 auto companies, over 150 leading news portals, 4 of top 5 antivirus companies, etc. Akamai also supported all the major news networks in broadcasting the Michael Jackson funeral.

Akamai has grown sales and earnings by 30% and 27%, respectively over the past 5 years. Although 2009 will show only marginal growth in earnings (not a bad thing in a deep recession), it is continuing to grow FCF. Akamai also has a strong history in beating analyst expectations with 8 quarters beating estimates with no negative surprises.

With an FPE of 11 and projections of 18-22% growth after 2010, Akamai has a good chance to double its recent price of $20 within 2-3 years.

Akamai is the poster child for dot-com implosions rising from the ashes. It was just a case of a great idea, great technology, and good management coming to market with a product that was really still in search of someone who needed it. They hung in their and continued to build out their infrastructure. Three events (some might argue there are more) served to suddenly make them relevant again.

1.) Microsoft got serious (well at least more so) about providing secutity patches and updates for their products in an easily accessible on-line manner.
2.) Apple found a way to make it easy to legally download music and content to a new device that became ubiquitous.
3.) The broadcast and cable networks decided that if they were going to remain relevant, they better get with the program and deliver content over the internet, as well as their traditional mediums.

Suddenly the Internet needed a service such as that provided by Akamai to allow this to work well without causing network meltdown during high usage periods. During this ramp up, they also managed to buy their largest competitor and retain a high percentage of their customers. This leads Akamai in the driver's seat of the content delivery space. There will be competitors, but they have the scale to remain dominant. This will become more important going forward as video explodes online. They also are getting into other areas such as application hosting. I think prospects look good and it's time to party like it's 1999. You do

I was thinking the price had gone up too far too fast to make this pick, but today we learn that CBS is launching 100 stations of college sports online channels set to stream 10,000 events in the coming year -- and Akamai will be delivering every last byte. Sweet!

AKAM is the hands-down leader in Internet content delivery. Since Internet growth is not likely to stall anytime soon and demand for digital content is certainly not slowing (can we say "video downloads"?), AKAM looks like a winner.

There is a lot to like about Akamai right now (as of 9/30/06 or in some cases TTM Trailing Twelve Months).

Current Ratio is great, 4.7 Indeed, Akamai has more cash than debt too.(276 million vs.200 million). The current ratio appears to be bolstered by a lot of cash. Not a lot of current inventory or some other current asset. Having this much cash on hand allows Akamai much leeway in what it wants to do. It's nice to have this option. It could choose to acquire another company. Invest in more servers, providing more quality to its customers. Not too many of our Rule Breaker's can brag about this right now. Our biotechs are a long way from bragging about this.

Long Term Debt/Equity (in millions from 12/05 fye)
200,000/624,214 = .32.

According to Yahoo Finance it's gotten better, moving to .27.

Total Debt/Equity = .29

Sometimes the LTD/Equity number will look good and this one won't. Companies try to shift their debts around to hide their spending ways. Not Akamai. Akamai is really managing its debt very well. This is excellent stuff here. You usually want to stay below .5 or so. It's just one number to look at. If the company had everything else for it you could put up with a higher ratio here.

Return on Assets
(Net Income/Total Assets)
48.09% TTM

This is an astounding growth figure that testifies to the ridiculous growth Akamai is experiencing.

Working Capital (cash + other current assets less cl)
(259.3+77.8-70.8)= $266.3 million

This is another great sign of a company managing its cash and debt well.

What will operating cash flows look like this year? Well, per Morningstar, we're looking at $108 million TTM. That number has went from -$18 in 2003 to $108 this year. This is amazing growth as well as sound management.

Looking at their operating cash flow along with their working capital numbers, it is quite apparent that Akamai has the cash to spend on its bills AND invest in growth. That's the kind of company you want to invest in. This is in stark contrast to our budding biotechs who will not be cash flow positive for years. Of course they are a different business altogether and their success is not measured in the same way as Akamai. But now I am digressing.

So, now we've done the financial health checkup on Akamai. Why aren't everyone and their brother buying it?

The stock price is perceived to be overvalued by industry standards. This is one of the key hallmarks of a pure Rule Breaker. All of the ratios that measure the current valuation of Akamai's stock are high. Price to Book ratio is 10.7, Price to Sales is 21.3, and the Price to Cash Flow is absurdly high at 68.9.

With that said, the forward PE according to Morningstar is 55.00. Yahoo Finance's number is 39.85. At any rate it's not an out of this world PE ratio. Sure, it's higher than the industry average but that is what is expected of a growth stock.

http://www.fusioninvesting.com/blog/2008/09/akamai-technologies-inc-akam-earnings-preview/
25 Sept 08
AKAM’s stock price has been hammered in the last four months, down from over $40 to $17. The masses are sure that competition will eat the lunch of this established leader and are pricing AKAM as if growth will be negative going forward.
Cheap on all metrics. Watch for slowing in growth.

- Lowest Price to free cash flow ever. FCF has increased every year since 2000.
- Lowest Price to sales since 2002.
- Slowing growth more than priced in.

For large sites, Akamai is really the only option unless they are willing to build out a similar infrastructure (ala Google). I don't see any option for businesses that do not want to build and maintain a similar setup.

Using normalized figures Akamai is growing FCF at about 100% YOY.
9 months of 2006 cash from operations 109,397,000
CAPEX 49,674,000
FCF = 59,723,000

9 months of 2005 cash from operations 55,125,000
CAPEX 28,055,000
FCF = 27,070,000

looks like FCF for the 1st 9 months of 2006 has increased 120% over the 1st 9 months 0f 2005

Cash and cash equivalents has risen from 367 million at the end of 2005 to 416 million for the first nine months of 2006,an increase in cash of 49 million.
I would welcome any comments.My take is that although it may still be early cash is starting to accumulate at nice pace.

I like. The demand for their service will increase for the foreseeable future. I think there is room for competition and yet still large growth and profits.

I think the current price in low 30's high 20's is a good entry point. I liked the stock at 35-38, so I still like it now...

The leader in their industry, which is growing by leaps and bounds, and they are not likely to lose that lead soon.

Do a little research and you'll understand that this is a commodity business, and like most commodities the price of its product is falling -- from about 90 cents per GB a year ago to less than 30 cents per GB today. Now THAT'S a business I'd want to be in. Good call, Fools.

It buys its competitors.... It's by far the leader in the Internet content delivery field which is just now starting to explode with full audio/visual multimedia capability Not only at the Youtube like level, but at the level of Buisness and TV as well. Now that broadband is becoming the standard - AKAMIA's speed up is becoming essential.

Just couldn't resist. I'm prepared for wide swings with this one, but totally confident it will turn out as a major winner.