Akamai distributes Internet content to desktops, laptops, tablets and smartphones: "...on its 90,000 servers which serve roughly 30% of all Web traffic at the edges of the Internet around the globe.", according to J. Bosnia in a May 11th, 2011 article Riverbed and Akamai Team for Hybrid Clouds in Investor's Business Daily. The company selectively collocates their servers in prime real estate locales around the global networks that comprise the Internet. This enables Web content such as text, video, graphics and applications to load quicker with less latency.
On July 27th, the stock traded at $29.48, then Akamai reported an earnings miss and it ran off the rails closing at $23.84 the next day. As CEO Paul Sagan stated in the Q2 2011 Earnings Call Transcript: "We've seen our top line growth slow down, driven primarily by the pricing and traffic dynamics in our media and software delivery business, and we've encountered a general slowdown in a few of the more mature markets outside of the U.S. where we operate due primarily to the tougher macro economic headwinds in those markets.". Translated into English, what CEO Sagan is saying is that they had to reduce prices due to commoditization in the broadband delivery industry and European sales are slowing down due to sovereign debt problems.
Sagan went on to say that prospects going forward still remain attractive and they are building their business around four main drivers: "The first one of these is the emergence of cloud computing in the enterprise, followed by the need for better IT security. Then there's the dramatic increase of connected devices, a phenomenon that is driving new applications and new demand for rapid and reliable delivery of data, especially in mobile networks. And finally, more and more rich media, especially long form video, is being consumed online...".
Some of this online streaming demand is from customers such as MTV, Independent Film Channel, CBS Sports and the National Football League. Other clients include Apple (AAPL), Microsoft (MSFT) and Best Buy (BBY), just to name a few, and, various government agencies like the U.S Air Force, the Defense Department and the Census Bureau. A very impressive customer base. However, they do have competition from the likes of Limelight (LLNW), Amazon (AMZN) and Level 3 Communications (LVLT).
To bolster its cloud computing presence, CEO Sagan discusses some of Akamai's initiatives in the 2011 Q1 Earnings Call Transcripts: "This month, IBM announced its WebSphere Application Accelerator for Public Networks and Hybrid Networks. These products integrate Akamai's application acceleration capability with IBM's WebSphere technologies.". WebSphere is a brand of enterprise software products that has been available for over ten years in the sector of Application and Integration Middleware. Akamai has also partnered with Rackspace Hosting (RAX) and Riverbed Technologies (RVBD) to help take marketshare.
In that same conference call, CEO Sagan goes on to say: "In the area of Internet security, which is a top priority of CIOs everywhere, we announced our new suite of cloud defense solutions. The Akamai DDoS defense architecture is designed to help customers therefore monitor and mitigate the impact of distributed denial service of attacks. The distributed computing platform was designed to protect our customer sites from malicious threats by absorbing large-scale attacks at the edges of the Internet, not at the backdoor of a client's data center.".
If you're trawling for equities in the cloud computing space, Akamai Technologies is a great organization to keep your eye on, but there's no immediate rush to jump into it post haste. After all, consensus earnings estimates as reported on Yahoo Finance are reported to be $1.45 for 2011 and only $1.63 for 2012. That's a nice gain, but nowhere near the projected 15% five year CAGR or the heavy duty 36% it grew on an annual basis in the previous half a decade. This decrease in business is one of the main reasons the stock got torpedoed and investors were left in the lurch.
A p/e ratio of 15 and a five year CAGR of 15% gives it a PEG ratio of one, which isn't very rich, but Akamai's strong suit isn't proprietary technology. Yes, they are making inroads into the cloud, but they are still primarily a content distribution company without a large moat around the business. Any entity with deep pockets can set up server farms. That's exactly what Amazon is doing right now. According to the analysts opinions on Yahoo Finance, six have it as a strong buy, four say it's a buy and thirteen want you to hold the security. I tend to take the more pessimistic side of the market these days and believe we are heading lower, so I am going to bite the bullet and wait and see if it goes lower.