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Online Video Beneficiaries: Akamai

Posted on Tuesday, Oct 2nd 2007

In my series on Online Video Beneficiaries, I have covered the network players like Cisco. In this post, I will look at the application acceleration angle. Gartner estimates that the market for application acceleration will exceed $3 billion by 2010. There has been a meteoric rise of online traffic with the online broadcast of live events and the popularity of devices like iPods and iPhones and the resulting boom in downloading as well as uploading of music and videos. A major beneficiary of this surge in online traffic and multimedia activity that requires fast and reliable transfers is Akamai.

Akamai Technologies(NASDAQ: AKAM) is the leading content delivery network (CDN) provider that accelerates the delivery of content and applications over the Internet. With the Internet playing a major role in everyday life and applications, Akamai’s business is booming. Its annual sales in 2006 went up 51% to $428.7 million and have more than doubled over 2004. It acquired one of its biggest competitors, Speedera in June, 2005. It followed this up with Nine Systems in December 2006 to build out its video serving capability. In March 2007, it acquired Netli to expand its application acceleration technology as well as its presence in the Software-As-A-Service (SAAS) market. In April 2007, it bought Red Swoosh to enhance its distributed Internet presence.

Akamai offers three core solutions: Digital Asset Solutions, Dynamic Site Solutions and Application Performance Solutions. Its Digital Asset Solutions are designed to overcome the challenges of peak online traffic and large file sizes. The Akamai EdgeSuite Delivery Solution accelerates the delivery of websites over the Internet by making the content accessible across its international network of servers. Other popular solutions following this model are Akamai Media Delivery Solution for media companies and Akamai Electronic Software Delivery Solution for software companies launching new products.

Akamai’s Dynamic Site Solutions are designed for accelerating business-to-consumer websites that integrate rich, collaborative content and applications into their online architecture. These solutions are used by retail and travel companies. Its Application Performance Solutions are designed to improve the performance of highly dynamic content common on corporate extranets and wide area networks.

For Q2 fiscal 2007, Akamai reported revenues of $152.7 million, up 52 % year-over-year. GAAP net income was $21.6 million, or $0.12 per diluted share, a 92 % year-over-year increase. Its customers under recurring revenue contracts also increased from 2,060 in June 2006 to 2,555 in June 2007. It is currently trading around $29 and hit a 52-week low of $27.75 on 28 September. Earlier this year in February, its price went up to $59.69.

So why this kind of punishment for the stock? Unrealistic expectations is one reason. Competitors creeping up is cited as another. Akamai owns over 50% of the CDN market, which continues to grow, and my general impression is that this is a GREAT company, playing in a GREAT market, and the recent slaughtering creates a very nice buying opportunity for investors. Just look at the phenomenal growth rates!

Akamai Technologies Inc. (AKAM)

This segment is a part in the series : Online Video Beneficiaries

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Great and informative article. Thank you.

Question-Why is the stock down so much in light of the above analysis of yours?

vincent thomas Thursday, October 4, 2007 at 10:24 AM PT

I think, this is not an easy company for investors to understand. The technology is complex, and I think few investors have a real appreciation of why it is such a growth area.

Coupled with that are the unrealistic expectations that analysts have set.

You see, great companies are built over a long time window. In that window, some hiccups happen, and sure, you may miss your estimates by a point or two.

So what? That’s all short term thinking in Wall Street, and my strategy is to use those short term expectation mismatch as an occasion to buy the stock. In fact, I just bought it, after I wrote this article.


Sramana Mitra Thursday, October 4, 2007 at 10:37 AM PT


Do you see companies like AT&T (who own the pipe/bandwidth) or Cisco (who make the equipment) stepping in with a new technology and changing the way a CDN works cutting Akamai out of the loop? In addition to this, is a fiber optic solution down the road a risk, or is that too far down the road?

Will James Thursday, October 4, 2007 at 1:15 PM PT

Hi Will,

That’s a very good question. Look at the market size numbers … If Akamai owns 50% of the CDN market, then the total available market in 2006 was roughly a Billion. May be in 2007, it would be $1.5 Billion or a bit more.

While the overall market has good CAGR in relative terms, I think, it is still a niche that may not be large enough for Cisco to build equipment for, or for the Telcos to go after.

In fact, Telcos can only go after a market like this if and only if Cisco or someone else supplies the technology, and that lack of off-the-shelf technology, I believe, will prevent the Telcos from having an easy entry into the segment.

They can enter, however, by acquiring a smaller Akamai competitor.


Sramana Mitra Thursday, October 4, 2007 at 1:50 PM PT

Hi Sramana,

This company’s market valuation has taken such a dramatic hit and I agree with you that this should be a tremendous buying opportunity for investors at this point. I know they have a conference call on 3rd quarter results scheduled for 10/24. When do you think we’ll start seeing a significant upswing in market valuation (assuming 3rd quarter results bring no unpleasnat surprises)?

Gary Thursday, October 4, 2007 at 5:49 PM PT

Oh boy, Gary, I am not sure I can predict that precisely. But assuming 3rd quarter results are fine, we should see at least some recovery soon.

The bigger upswing will come if Akamai announces some strategic maneuvers that promise to accelerate their growth. Acquisitions, particularly those that diversify some of the risk factors people are apprehensive of.

There are a variety of services in and around their core area that they could add on to the portfolio. I have a stealth company client that is an example. We’re discussing a partnership with them.

I am just telling you the kinds of things I would advise them to look into if I were actually advising them. And if they did some of that, that’s the kind of news that would move the stock.

Makes sense?


Sramana Mitra Thursday, October 4, 2007 at 7:54 PM PT

Thank you Sramana. What you said makes very good sense.

Gary Thursday, October 4, 2007 at 8:39 PM PT

Isn’t the P/E still high at 69 times the earning ?

Murthy Thursday, October 4, 2007 at 10:17 PM PT

Yes, but it is not unusual with companies whose prospects are considered bright, and the profitability is low because of continuous investments into growth.

Look at, Concur, SunPower. They all have high P/Es.

Also, Akamai is a service, with a predictable revenue streams that are recurring, and that dynamic tends to create higher P/Es.


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