Akamai Technologies Riding the Cloud
Declan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Akamai Technologies (NASDAQ: AKAM) was first mentioned here back in April. The earnings outlook from April was lowered to $0.36-$0.38 for Q2 based on higher costs to absorb Contendo and Blaze acquisitions. In reality, the company reported Q2 figures of $0.43, well ahead of the company's upper expectations of $0.38 and analyst expectations of $0.37. For the next quarter the company projects an EPS of $0.40 to $0.42, which is around analyst expectations for $0.41. The past three quarters have seen expectations handily beaten and a push to $0.45-0.46 would keep with recent trends. However, the Olympics may artificially inflate Q3 figures in what is normally a slow quarter for internet use.
Key areas driving revenue for Q2 were Cloud computing, Media & Entertainment, eCommerce and Public Sector service growth. The company also alluded to how the Contendo acquisition will drive business on the Cloud side and offer a pipeline of products to release in future years. However, they remained cautious on long term projections despite the strong performance in recent quarters. In the mobile arena the company leverages itself by using price drops to drive data growth, thereby expanding its customer base without having to employ a 'catch up' strategy of pricing with respect to its competitors. Furthermore, the sharp increase in global broadband rates (particularly in SE Asia / Akamai's Asia-Pacific business saw "accelerated growth" in Q2, but no figure) will increase data consumption, offsetting losses on price cuts.
Not surprisingly, the jump in profit erased a sizable chunk of share price losses triggered by the previous quarter's results. The stock is pushing against $40, a stumbling block over 2011/12, but now could be third time lucky. The company is engaged in a share buyback program to supplement demand as much as it improves per share earnings metrics. The short interest ratio of 3.9% (6.8 million shares) is not excessive, but for a stock which trades a daily average of 1.5 million shares it could offer a short-cover kicker if it was to break above $40.
As a profitable company, Akamai benefits from a positive P/E ratio at 36, which is slightly higher than the industry standard of 26, but competitive when future growth prospects are considered following its two acquisitions. This gives it a key advantage compared to competitors Level 3 Communications (NYSE: LVLT) and Limelight Networks (NASDAQ: LLNW), which have to contend with improving - yet still losing - earnings. Despite the acquisitions, Akamai still managed to retain cash and equivalents of $1 billion; Akamai generates $0.074 of operating cash flow per $1 in share value compared to $0.075 of Level 3 Communications and $0.045 of Limelight Networks. But Akamai has no long term debt to service, unlike Level 3 Communications and LimeLight Networks. Just recently, it appears Akamai is set to beat out Limelight for an AT&T $100 million (CDN) Reseller Deal by being better positioned to guarantee revenue for AT&T.
While the overall market is looking a little high, there are always opportunities to beat the crowd. Akamai is a long way from challenging the highs of 2007 or 2010 and this protection may enable investors to accumulate on the "cheap." Long term, how Akamai maximizes the Contendo acquisition will likely determine revenues over the next 18 months, but continued growth in mobile data consumption and Cloud computing do offer a staple from which Akamai can only benefit.
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