Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Akamai Technologies (NAS: AKAM) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at Akamai Technologies.
What We Want to See
Pass or Fail?
5-Year Annual Revenue Growth > 15%
1-Year Revenue Growth > 12%
Gross Margin > 35%
Net Margin > 15%
Debt to Equity < 50%
Current Ratio > 1.3
Return on Equity > 15%
Normalized P/E < 20
Current Yield > 2%
5-Year Dividend Growth > 10%
6 out of 10
Source: S&P Capital IQ. Total score = number of passes.
Since we looked at Akamai Technologies last year, the company kept its score the same. Slightly slower growth is evident, but the big change is the company's substantial drop in valuation thanks to a 45% fall for the shares over the past year.
With the amount of content on the Internet, Akamai's data delivery technology should be in higher demand than ever. But the company has seen some major setbacks. One of the biggest was the decision from Netflix (NAS: NFLX) late last year to go from having Akamai as its sole primary provider for streaming content, instead bringing competitorsLimelight Networks (NAS: LLNW) and Level 3 Communications (NAS: LVLT) onboard as well.
Moreover, even more competition stands in the way of growth for Akamai. AT&T (NYS: T) reportedly uses EdgeCast to power its content delivery network. Cotendo, another upstart, has worked with Google (NAS: GOOG) on open-sourcing web acceleration -- a move which prompted Akamai's ongoing lawsuit against Cotendo.
With falling growth and lackluster margins, Akamai deserves the multiple-compression it's seen over the past year. Now with Netflix having problems of its own, Akamai needs to pursue business more aggressively and earn the growth that even its somewhat lower valuation still builds into the stock price.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.
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At the time thisarticle was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Google. Motley Fool newsletter services have recommended buying shares of Netflix and Google. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.
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