Akami Technology’s (AKAM) beautiful earnings report last week had a lot of growth investors slapping their foreheads in a why-didn’t-we-see-this-earlier moment. They ramped up the share price nearly 18% in the following hours, as seen in a stock chart, clamoring to grab pieces of the company.
With a $7.58 billion market cap, Akami is hardly an obscure company. But perhaps investors underappreciated a couple of key services it sells: making web page downloads instant, and video streaming seamless, across desktops and mobile devices alike. Growth in this stuff led Akami to report underlying revenue growth in the first quarter of 18%, a 65% increase in net income, and some surprising strength in profit margins. The company was optimistic about the next quarter too, predicting another 15% to 18% of revenue growth.
It’s hard to underestimate the demand for content delivery networks at the moment. Corporations are scrambling to get their information and apps onto smartphones and tablets, and the public is growing increasingly impatient with those who don’t do this well. And as anyone who has used a smartphone lately knows, there are plenty of sites that still don’t. Moreover, a boom in Internet video demands faster and better quality streaming technology every day. Google’s (GOOG) YouTube alone reported 50% gain in viewership last year, and that’s a well-established service. At a time when video streamers like Netflix (NFLX) and Amazon.com (AMZN) are also growing fast, a company that can perfect the service should be very well liked.
Akami, however, doesn’t get all that business, and this little caveat is what stagnated the share price recently. Some of its services, like cloud, compete against a whole host of companies, including Amazon and Intel (INTC). Its biggest competition for streaming and other content delivery network services is its own customers. Amazon, for example, has plans to bring this work slowly in-house over the next few years. Akami has acknowledged the in-house services problem but also noted that what they do is pretty difficult, and even gargantuan tech companies have had trouble replicating it for themselves.
But worries like these have knocked back Akami’s share price from higher valuations. Before the latest results, Akami’s shares were trading at an historic PE ratio of about 27; not exactly incredible for company in double-digit growth. (Rackspace Hosting (RAX), a similarly-sized competitor, trades at a price-earnings ratio of 62.) That historic PE rose to about 33 post-earnings, and its forward valuation is about 30.
Just the number of cat videos still in the making might make that price a bargain.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at email@example.com.
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