"I haven't been this pleased in a long time," Akamai (NAS: AKAM) chief executive Paul Sagan said when we spoke about his company's second-quarter earnings report last night.
Sound like hyperbole? Don't tell that to investors. They've bid up the stock more than 22% this morning after inspecting the company's better-than-expected results:
Source: Yahoo! Finance, Akamai press release.
Color me envious, and more than a little embarrassed at giving up on Akamai so soon.
Last year at this time, I bid goodbye to a long-held position in Akamai shares. Traffic wasn't growing as fast as I'd hoped and value-added services weren't doing enough to overcome pricing pressure in other areas. Most signs pointed to competitors such as Cotendo and EdgeCast, both of which had partnered with Google, taking a larger than expected bite out of Akamai's business.
Fast-forward a year. Akamai has since acquired Cotendo, and EdgeCast, while still a threat, appears to be doing more to hurt Limelight Networks (NAS: LLNW) and Level 3 Communications (NAS: LVLT) than Akamai. Netflix's (NAS: NFLX) decision to build its own content delivery network may also be taking a toll.
Why Akamai is thriving
Sagan attributed Q2's big gains to a combination of success selling "cloud infrastructure" services and cost cutting. More than 75% of new customers purchased one or more cloud services, CFO James Benson said during last night's conference call with analysts.
When Sagan talks about cloud infrastructure, he's referring to accelerating, securing, and delivering company-specific content or software over the Internet using its private network. And that's just part of the business; Akamai also counts Rackspace (NYS: RAX) as a hosting partner for serving clients that prefer to avoid spending capital on network equipment.
Together, along with deduplication specialist Riverbed Technology, they're helping to create what the industry has come to call "private clouds," or pools of software, data storage capacity, and processing power set aside for only a limited group of users.
In terms of cost cutting, Sagan said efforts to reduce expenses have taken hold faster than expected, and a result, helped the company crush internal and Wall Street profit targets. Trouble is, that doesn't quite hold true on the net margin line, where 23.4% of revenue flowed to the bottom line on a normalized, or non-GAAP, basis. Last year, 23.7% of revenue showed up as normalized profit.
So what really drove the EPS gain? Share repurchases. According to its press release, Akamai has spent some $558 million to buy back 20 million shares at an average price of $27.27 since April 2009. Now that spending is having an impact: Akamai gained $0.02 a share for having 8.4 million fewer shares eligible to receive a slice of Q2's profit pie.
Where does the stock go from here? Analysts are calling for profits to grow 13.3% annually over the next five years. The stock, meanwhile, trades for more than 17 times estimates, resulting in a reasonable but not exactly cheap PEG ratio of 1.3. Bargain shoppers will want to wait for a better entry point.
For my own part, I'm not yet ready to make an outperform CAPScall on the stock. While I like the revenue growth trend and Akamai's acquisitions and partnerships, I think there's still too much artificial stimulus aiding the shares at current prices.
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The article Akamai Sticks It to Doubters Like Me originally appeared on Fool.com.
Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Netflix, Rackspace Hosting, and Riverbed Technology at the time of publication. He also had a long-term call options position in Netflix. Check out Tim's web home, portfolio holdings and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.The Motley Fool owns shares of Netflix and Riverbed Technology. Motley Fool newsletter services have recommended buying shares of Riverbed Technology, Rackspace Hosting, and Netflix. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.