Time To Buy Akamai?

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

The content delivery company Akamai Technologies (NASDAQ: AKAM) was down over 13% after its fourth quarter earnings announcement. Could this be a good time for investors to jump into the stock? I believe the company is at least worth considering.

Although the stock was down, revenue was up 16% for the quarter on a year-over-year basis, and EPS beat consensus estimates. Akamai posted EPS of $0.54, compared to expectations of $0.50. The one disappointment of the announcement was that revenues missed expectations, with the company posting revenue of $378 million, versus the $381 million expected by Wall Street (check out Akamai's profile). As a result, I think the reaction against the stock was overdone. 

In last quarter's earnings announcement, Akamai's CEO commented on just how great 2012 was overall for the company:

With strong revenue and profit performance in the fourth quarter, Akamai closed out 2012 with record results on both the top and bottom line.

The competition

Akamai helps customers address challenges related to bandwidth constraints, and is an industry leader at that, delivering around 30% of all Internet traffic worldwide. Other major players in the industry include Rackspace Hosting (NYSE: RAX), InterXion Holding (NYSE: INXN), Limelight Networks (NASDAQ: LLNW), and Level 3 Communications (NYSE: LVLT). So how have these competitors been performing? 

Rackspace delivers computing-as-a-service, and recently signed a deal with the data center REIT Digital Realty to lease future data center space (read more about this REIT niche). As far as recent quarterly results, the company posted 4Q EPS of $0.21, compared to consensus estimates of $0.22. However, Rackspace is expected to see robust sales and earnings growth for 2013 of 22% and 35%, respectively, but its valuation makes it a concerning investment. The tech company trades at 68 times earnings, which tops all major peers. 

InterXion operates data center facilitates for processing and storage of data content. The company managed to miss last quarter earnings estimates by 8%, and recent news shows that Citi downgraded the stock from buy to neutral based on the risk of continued challenges in Europe. The weakness in Europe is especially concerning for the company considering that it derives all of its revenue from Europe. What's more, the average Wall Street analysts' price target is 15% below InterXion's current trading price. 

Another major peer, Limelight, has been on a tear over the past few months after announcing the replacement of its CEO in November. The stock is up 40% since the CEO announcement, despite missing 4Q earnings by 50%. The future outlook, however, is not overly exciting for Limelight, which is expected to continue its string of negative earnings for the next couple of years, and is expected to post negative EPS of $0.13 for 2013 and negative EPS of $0.15 for 2014. 

Meanwhile, Level 3's recent earnings results pushed the stock down by 13% earlier this month. The company reported 4Q results that showed an EPS loss of $0.26, well above the expected $0.18 per share loss. The company is still implementing the 2011 Global Crossing acquisition, which should provide the company with revenue diversification and offer synergies over the long run. However, it appears this acquisition may continue to strain the company in the interim, where 2012 interest expenses were upwards of $744 million, versus 2012 EBIT of $733 million, and the company's 4Q interest coverage ratio dipped below 1.0x to 0.9x. 

All of these tech-focused companies are down year to date on concerns over weak demand:

<img src="http://media.ycharts.com/charts/132d40b0d0d27c3c95c5de4aae39f625.png" />

With all the companies having been pressured lately, what makes Akamai the best pick? It's a matter of valuation, where Akamai reigns supreme.  

Valuation

Akamai trades on the low-end of its peers on a valuation basis with a 15x price to earnings ratio, which is also on the low-end of its five-year P/E range of 9.3x to 48.8x. Let's see just how cheap Akamai is on P/E and P/CF bases compared to the others:

Price to Earnings (next year earnings)

  • Akamai 15x
  • Rackspace Holdings 68x
  • Interxion Holding 27x
  • Limelight Networks n/a
  • Level 3 65x

Price to Operating Cash Flow

  • Akamai 15x
  • Rackspace Holdings 29x
  • Interxion Holding 27x
  • Limelight Networks 29x
  • Level 3 23x

Future growth

Solid growth for Akamai going forward should come by way of increased data usage, which should increase bandwidth requirements. This will come from the adoption of cloud computing technologies, as cloud solutions makes up almost 60% of Akamai revenues. Tech research firm Gartner believes that cloud spending will increase by 5% through 2015. Meanwhile, IDC believes that spending on public and private cloud computing will be nearly 40% of all IT spending by 2015, up from the current 5%. These growth prospects should help drive Akamai's earnings, and consequentially, its stock price higher. 

Don't be fooled

The industry appears to be promising, with a rising need for addressing bandwidth constraints, and Akamai is well positioned as an industry leader. What's more, the company has no long-term debt and over $1 billion in cash on hand. As far as hedge fund interest, billionaire Ken Griffin upped his stake in Akamai by over 500% during the third quarter (check out Griffin's new picks). The top hedge fund owner for Akamai, with over 4.8 million shares, is Coatue Management (see Coatue's profile). Coatue is a tech-focused hedge fund managed by 'tiger cub' Philippe Laffont.


mhargra 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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