Valuation: Akamai Technologies Inc. (AKAM)

Company Review: Akamai Technologies Inc. (AKAM)

Company Profile: Akamai Technologies Inc. (obtained via Google Finance)

Akamai Technologies, Inc. (Akamai), incorporated in 1998, provides services for accelerating and improving the delivery of content and applications over the Internet. The Company’s solutions are designed to help businesses, government agencies and other enterprises enhance their revenue streams and reduce costs by maximizing the performance of their online businesses. By advancing the performance and reliability of their Websites, through the Akamai EdgePlatform, the technological platform of Akamai’s business solutions, customers are able to utilize the Company’s infrastructure and reduce expenses associated with internal infrastructure build-ups. Akamai offers services and solutions for digital media distribution and storage, content and application delivery, application performance services, on demand managed services and Website intelligence. In March 2007, the Company completed the acquisition of Netli, Inc., a privately held company based in Mountain View, California. In April 2007, the Company acquired Red Swoosh, Inc.

 Business and Management Review

1) Is the business simple and understandable? 

This is a simple business that creates a digital operating environment for the World Wide Web traffic. Their global platform of thousands of specially-equipped servers helps the Internet resist the crush of daily requests for rich, dynamic, and interactive content, transactions, and applications. They detect and avoid Internet problem spots and vulnerabilities to ensure Websites perform optimally.

 2) Does the business have a consistent operating history? 

They had reported unsustainable performance for the past 10 years, mostly injected by the volatility of this business. In addition to that, this stock is in the systems & security industry, which has been a poor industry for the last 10 years, though it has been much stronger the past five. Nonetheless, Akamai Technologies Inc. has been one of the strongest performers in its industry over the five-year period.

 3) Does the system have favorable long term prospects? 

Most stocks in the systems & security industry have seen steadily growing revenue and earnings over the past three years. AKAM’s stock has done better than most of its peers and its revenues have grown very rapidly over the past three years. In contrast to its competitors, this stock’s earnings per share have grown at a very high rate over past three years, though they actually declined last year. AKAM would probably have to raise additional capital from outside sources at some point if it continues to hold a growth rate that is less than the rate at which its EPS have grown.

 4) Is management rational? 

I find management to be rational.

 5) Is management candid with its shareholders? 

Management seems to be candid with its shareholders as they have a investor relations site.

 6) Does management resist the institutional imperative? 

AKAM’s management does resist the institutional imperative.

 Financial and Value Review

Defensive

1) Size of firm 

The market cap of Akamai Technologies Inc. is higher than $2 billion.  “Pass”

 2) Strong financial condition 

The company current ratio is above 2. “Pass”

 3) Earnings stability 

AKAM has not had positive net income for the past 10 years. “Fail”

 4) Dividend record 

The company has not made dividend payments for the last 10 years. “Fail”

 5) Earnings growth 

It has not have an increase of one-third in EPS for the previous 10 years. “Fail”

 6) Price to earnings analysis 

Its PE ratio is higher than 20. “Fail”

 7) Price to book analysis 

The company PB ratio is higher than 2.5 and PB*PE ratio higher than 50. “Fail”

Conclusion 

Having passed only two of the required seven tests for the defensive investor following Benjamin Graham’s value investing strategy, we do not believe Akamai Technologies Inc. is suitable for the defensive investor.

  Enterprising

1) Strong financial condition 

Akamai Technologies Inc. posses a current ratio higher than 1.5, but its debt to NCA is not higher than 1.1. ”Fail”

 2) Earnings stability 

The company has not had positive net income for the prior five years. “Fail”

 3) Dividend record 

AKAM does not pay dividends currently. “Fail”

 4) Earnings growth 

Its earnings are greater than 5 years ago. “Pass”

 5) Price 

Its stock price is higher than 150% of the net tangible assets. “Fail”

Conclusion

We find AKAM to be unsuitable for the enterprising investor, having passed 2 out of 5 tests.

Valuation

Our valuation model finds a fair value to be $38.62.  

Opinion 

Since the company is currently trading at about $36.95, we believe AKAM is fair valued, but would not be a suitable investment for the defensive or enterprising investor.

None of the staff at ModernGraham held a position in Akamai Technologies Inc. at the time of publication.  Also, please read our disclaimer and Our Methods.