A Top-Notch Internet Growth Play

Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Many investors have heard the name Akamai (NASDAQ: AKAM), but not all investors understand what the company does. Essentially, Akamai makes the Internet faster and more secure, and delivers approximately 20% of web content around the world. But while the company's future prospects look good, strong headwinds could still hinder Akamai’s stock performance. 

Important numbers

Akamai has a lot going for it at the moment. Demand for security and content delivery speed are high.

Security: Hackers have increased their attacks on a variety of institutions including major U.S. banks and government websites.

Content Delivery Speed: Growing popularity of smartphones and tablets. 

Akamai is currently trading at 19 times forward earnings. This might seem slightly high, but Akamai has the potential to grow into this expectation. It should also be noted that peers are a lot more expensive. For example, Rackspace (NYSE: RAX) is trading at 41 times forward earnings, and Level 3 Communications (NYSE: LVLT) is trading at 36 times forward earnings.

Akamai sports a more appealing profit margin than peers at 16.33%. Akamai's effective cost management has played a major role here. Rackspace has a profit margin of 7.99% (not bad), and Level 3 Communications has a profit margin of -5.69% (not good).

Debt management also plays a role in these comparisons. Below are the debt-to-equity ratios for each company:

  • Akamai: 0.00 (ideal)
  • Rackspace: 0.12 (impressive)
  • Level 3 Communications: 7.75 (frighteningly high)  

Akamai has $513.01 million in cash and short-term equivalents, and it has no debt. This will make the company more resilient than most peers during difficult times. A strong cash position allows for many strategic options. If the stock falters, Akamai has enough cash to increase the capital it distributes to shareholders. This has the potential to buoy the stock price.  

Other important numbers include a first-quarter year over year increase of 15.20% in revenue, and an increase of 65.40% in earnings. An increase in Internet traffic played a big role in these numbers.

Have you happened to notice fewer people at the mall? That's because they're shopping online. If they're not shopping online, then they might be communicating on a social media site. If not, then perhaps they're downloading software, playing an online game, or watching an online video. Any of these scenarios is good for Akamai. And if someone is using a mobile device, it's still likely to benefit Akamai. 

Akamai offered strong guidance, and management seems to be genuinely confident in long-term future prospects. Akamai also has a strong history of consistently improving revenue and earnings on an annual basis. The only potential negative here is increased investments, which could slightly impact the bottom line in the near future.

Akamai’s long-term potential

Do you plan on shopping online at some point? Will you surf the Internet today, tomorrow, or next week? Will you listen to online music in the future? Will you watch streaming videos online? If you answered yes to any of these questions, then chances are good that Akamai has already played a role in your life for a significant amount of time.

Akamai’s slightly high valuation makes it a risky play due to uncertain macroeconomic conditions. Despite the company's importance, its stock hasn’t held up well in difficult stock market environments. Experienced investors and traders tend to ride the technology wave when times are good, but they abandon ship when the market heads south.  

Over the long haul, if Akamai fails, then either it’s the end of the Internet or the end of the world. If neither of those scenarios seem likely to you, then Akamai should be a good long-term play. However, due to an uncertain macroeconomic environment, you should strongly consider entering this position slowly. 

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Rackspace Hosting. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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