Akamai Will Be Essential for Hotspot Prevention

by: Sramana Mitra December 17, 2007 | about stocks: AKAM    

Sramana Mitra

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I have previously written about Akamai as an Online Video beneficiary, and about the impact of Level 3’s price cuts on Akamai. You can also read my interview with its founder to see why I think guys like Howard Lindzon are rushing too soon in shorting Akamai.

On October 24, 2007, Akamai Technologies, Inc. (NASDAQ: AKAM) reported its financial results for Q3 ending September 30, 2007. Its revenue was $161.2 million, up 6% q-o-q and 45% y-o-y. Its GAAP net income was $24.3 million, or $0.13 diluted EPS, up 12% q-o-q and 73% y-o-y, and its GAAP gross profit margin was 73%, which is about a point lower than Q2.

Akamai added 61 customers in the quarter taking its customer count to 2,616. It will also be acting as the exclusive content distribution provider in the U.S. for Starbucks (SBUX) stores following its deal with Apple (AAPL). The deal allows iTunes users to download a wide range of Starbucks'' popular Hear Music titles. It is also launching a showcase portal for high definition videos from customers including the BBC, NBA, and MTV. Other exciting innovations include the launch of large file optimization and the introduction of its IP-based application accelerator.

For Q4, Akamai expects revenue in the range of $172 to $176 million. Normalized diluted EPS is expected to be between $0.37 and $0.38. For the fiscal year 2007, it is on track to meet its revenue estimate of $625 and $629 million, and to deliver 46% to 47% annual growth. In 2008, it expects to achieve 25% to 30% growth in both revenue and normalized EPS. It looks like the company will achieve its 1-billion revenue goal well before the end of the decade.

Its stock is trading around $35 after hitting a 52-week low of $27.75. Market cap is around $5.9 billion. I am standing by my recommendation that Akamai is a good company to hold on to for the long term. I own the stock myself, and have a lot of faith in the company’s ability to deliver innovative solutions to the networking problems in 2008 and beyond.

With IPTV around the corner, the video delivery problem in particular is going to become acute, I believe that Akamai’s network traffic optimization algorithms are not only going to be handy, but perhaps, essential. The me-too’s just don’t have the level of technology to tackle this enormous routing/hotspot prevention algorithm challenge.

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This article has 1 comment:

  •  
    Dec 17 11:07 AM
    With VOD, IPTV and other broadband intensive applications popping up everyday, I don't think that anyone doubts that Akamai is well positioned for growth, but that doesn't answer the question of what should that growth should be worth to investors. In your article, you point out how much Akamai is making, but there isn't any discussion of why these numbers deserve such a high multiple. I'd like to see a discussion of why they are worth a premium, instead of just pointing towards IPTV as a growth driver. With a market cap of $5.5 billion, how much upside is really left in this story? In the past, Akamai has been valued on free cash flow, but as their tax breaks end, what impact will this have on their valuation? While Akamai is clearly a very well run company, at what point do you have to consider the competition, instead of valuing the company as a monopoly? These are all questions that people should be asking. Instead of focusing on the growth of their underlying business, I'd rather see an open discussion of why investors should be paying almost ten times their sales, for a company that is seeing their core business commoditized?
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