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Back Into Akamai


How the twisted thinking of two analysts tell us all we need to know about Akamai's stock.

Back on September 15 of last year I sold the bulk of my then very large Akamai (AKAM) position. The stock was around $46.50 and I explained the principal reason for selling as follows:
"The fundies story still seems intact, in fact it may still be getting better. My concern is that everyone seems to be realizing this now. AKAM has set a pattern of beating estimates and raising big in the face of skeptical analysts. Now the analysts are beginning to get in front of the company, and the bar is getting raised."

The stock proceeded to touch $60 without me.

Fast forward to today:
  • The business has only gotten better.

  • The company is growing revenues and net income at a 50% clip, and generates cash way in excess of that, thanks to $300+ mln in loss carry-forwards, which will allow it not to pay cash taxes until well into the next decade.

  • It has no net debt.

  • Its basic business is all about the efficient delivery and management of IP data. If you think that's a big market opportunity today, wrap your head around this little statistic: as of last month, 70% of 334 mln Americans were internet users; as of last month 10.4% of 1.3 billion Chinese were internet users; and as of last month 3.5% of 1.1 billion Indians used the internet – can you say unpenetrated turf?

  • If both the top and bottom line growth rate next year slows to 37.5%, and falls by 7.5% every year thereafter until a final rate of growth of 15%, by 2011 AKAM will have revenues of about $1.5 bln and EPS of $3.05, and will have grown at a 26% average for the next four years.

  • The stock closed yesterday at $43.

These are verbatim exchanges from last week's AKAM call with my highlights:

  • Analyst (Kept anonymous to avoid unnecessary embarrassment):

    Just from a high level perspective, I think you've trained the Street here that you guys put up good results and typically there's an expectation [inaudible] numbers move up. If you look back at this quarter, is there something that surprised you in the market? Are we kind of going through the hypergrowth phase of this? Is there some change fundamentally out there?

  • CEO Paul Sagan:

    No, actually, I was very pleased with the results. What we said last year - in the first half of the year - is, we were surprised at how fast the market was accelerating. I think if you look at our guidance this year it was for some pretty bold growth. If you look at the mid range, it's almost 45% revenue growth and now that we reported a quarter almost a third of the way through the year, we still feel very comfortable that we're going to see what I think is exceptionally strong growth off of a large number last year and even stronger expansion on the bottom line. So, no, I don't see anything fundamentally different and am extremely pleased with the performance. I think that some people may have gotten very comfortable with the fact that we kept beating the guidance early last year and decided well, that's just the way the world works and we kept saying over and over again, we used the same methodology. We're conservative, we're trying to understand what's going on in our business, we moved the guidance up very strongly that part of last year because we had confidence in the numbers, and we continue to have confidence in the numbers and people should listen really carefully to what we say.

  • Analyst (Also kept anonymous to avoid unnecessary embarrassment, even though given the prior question it might serve her well to be publicly embarrassed): this is the first quarter in six quarters you haven't been over the high end of guidance for the quarter. And I heard what you just said about you say over and over you can't keep beating and raising. I'm wondering was there any disappointment for you internally in this quarter and did anything change between the time you gave guidance in January when presumably some of the prices on the renewals in December were set and the current time...

  • CEO Paul Sagan:

    Let me stop you right there. No, we always tell you exactly what we think is going to happen. We got some very pleasant surprises last year and we explained why the phenomenon that we thought was going on that we then captured in our guidance going forward. We gave what we thought was accurate guidance and actually we came in exactly there, so were very pleased. In fact I'd like to be exactly right on it, like to give you an exact dollar and exact penny number and then hit it because it says we can understand everything that's going on in our business. We came in near the high end of the range. I thought it was a very strong quarter and we continue to be very optimistic about the year.

In my humble opinion, the two borderline demented questions you read above encapsulate the reason why the stock is down $12 in five days, and why I'm back into the stock and hoping for lower prices still, so that I can get even longer. Who says analysts cannot hand us some good opportunities?
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Position in AKAM
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