Not losing faith in AKAM

I have spent the better part of my time lately trying to understand what exactly is wrong with Akamai (NASDAQ: AKAM). The fundamentals have not changed at all, in fact, management continues to reiterate their expectations of 400 bps of EBITDA margin expansion in 2007. The company also seems to be very active in signing costumers and differentiating themselves from the competition, as exemplified in their live streaming of Adobe Flash Player video format (AKAM has broadcast events like Nickelodeon’s Kid Choice Awards in this format). And on an industry basis, content owners are becoming more concerned than ever with the need to deliver their content to broader audiences faster, a trend that favors CDN vendors. In short, it just seems like investors have lost faith.

But, from everything I have read, AKAM is doing just fine. Strong market share, strong market fundamentals. Only a weak share price. Since their 1Q announcement on April 25, shares have fallen close to 22%, while the S&P 500 has gained approximately 1.4% in the same period. On a 2008 P/E basis, the shares went from trading close to 32.0x (prior to earnings) to 25.0x (today). How much cheaper will the shares get? Companies with comparable 2008 growth (for example Google) trade at approximately 25.0x 2008 EPS estimates. Will investors regain faith if shares trade any lower?

As a strong believer in AKAM and their business model, I continue to wait for a catalyst, or for a sign that 2Q will bring the surprise that 1Q did not. In the end, that is what everyone was looking for, to be surprised (unfortunately, growing revenues by 57% q-o-q, proved to not be enough). I have not lost faith though. I remain positive, and I believe that at current levels (25x 08 P/E), it is tough to find a similar low price / growth story that has the potential to deliver in the long term the way Akamai can.


AKAM indexed price since 1Q '07 earnings release