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Akamai Has Room to Run, by Alan Farley
Akamai Technologies is sitting in a sweet spot. The stock broke out above key resistance at $18 last November and has been moving higher in a steady uptrend.
Although it has nearly doubled in price over the last five months, the technicals suggest the rally has considerable room to run. In fact, the current pattern shows little overhead resistance until the rally approaches $40. That level would mark a good place for traders and investors to start taking profits.
Avoid the Pain if the Bubble Bursts, by Richard Suttmeier
Akamai Technologies is rated a sell by ValuEngine and is trading 107.1% over its fair value of $15.72. The weekly chart profile is overbought, with the five-week modified moving average at $28.67. My model shows a monthly value level of $27.66, which is where I would expect buyers to emerge if the stock fell into a downtrend. My model currently has no pivots and risky levels for Akamai.
When a stock is both overvalued and overbought without a risky level, it is moving higher on pure momentum in a chart pattern I refer to as parabolic. With a stock that's gone parabolic, investors should avoid adding to positions, stay with their current position and raise a protective stop each week. I favor a sell stop on a weekly close below the five-week MMA, and I would raise the stop as this MMA moves higher. Protect gains, and avoid the pain when the stock's bubble bursts.
On Dec. 12 and Jan. 12, I projected that Akamai had risky areas at $23.86 and $24.74. Investors who reduced holdings at these levels booked some nice gains, but obviously my model did not anticipate the parabolic that evolved once these levels were taken out. However, my model has proved correct on about 75% of the stocks in the software industry.
Akamai's Streaming Ahead, by the TSC Breakout Stocks Team
This was originally sent to subscribers of TheStreet.com Breakout Stocks on March 1 at 2:12 p.m. EST. For more information on this newsletter, click here.
The world is dependent on information, and increasing numbers of people worldwide are getting their news and entertainment from the Internet. That is why we believe Akamai, which provides the technology for companies to make their content available for streaming or download on the Web, is poised for a period of solid earnings growth and premium shareholder gains.
That said, we aren't adding Akamai to our model portfolio today, because we want to wait for a better entry point in lieu of the stock's 100% run-up since September. A pullback under $25 from the current quote of $26.91 would compel us to initiate a position. We will update subscribers before taking action.
Akamai makes money by selling space in its server network to companies with Web applications so they can deliver their content over the Internet.
According to Akamai's Web site, the company has 15,000 servers in 1,100 networks in 69 countries. The company's technology delivers content from an origin database to end users, thus reducing the need for in-house technology for companies expanding to the Web.
Akamai is well positioned, with 40 resellers of its products to capture a large percentage of the infrastructure business required to deliver digital content over the Web. One of the big drivers of Akamai's products is content, such as video and music sold over the Web that can be downloaded into a portable device such as an iPod. With more than 14 million iPods sold by
in the fourth quarter, and the number of song downloads from iTunes surpassing 1 billion since April 2003, Akamai is experiencing an enormous expansion of its addressable market.
With its iPods, Apple is a high-profile Akamai customer. The two companies affirmed their partnership in the fourth quarter when they agreed to extend their current contract. With most of the demand now coming from the music side, we believe higher adoption and use of video iPods -- which were released in October -- will have a meaningfully positive impact in the coming year.
In addition, the company stands to benefit from increased adoption of Web-based retailing by offline retailers that don't have the technological know-how to operate their own Web sites in a cost-efficient manner.
According to data from comScore, which monitors and rates Web traffic,
has catapulted to the No. 3 position among most-visited Web sites among retailers, behind only
, a Wal-Mart competitor, comes in a close fifth, ahead of even Apple. We interpret this as proof that online retailing is becoming a critical component of retail sales, and we predict more retailers will join companies such as Wal-Mart and exploit affordable marketing access to mass consumers.
Akamai announced fourth-quarter revenue of $82.6 million and earnings per share of 16 cents vs. analyst expectations for $78.9 in revenue and 15 cents a share in earnings. Despite these solid results, we believe 2006 will be even better. Akamai added 80 customers in the fourth quarter, vs. 52 in the year-ago period, and now has 1,910 customers.
Gross margins could head higher in 2006 from the fourth-quarter levels of 30.2%. As research firm Deutsche Bank points out in a recent note, Akamai did not receive revenue from several deals signed in the fourth quarter, but did expense sales costs associated with the deals. Therefore, the revenue recognized from these new deals will come with higher margins.
Akamai is forecast by analysts to grow its EPS by 34% in 2006 to 70 cents from 52 cents, and another 30% in 2007 to 91 cents. Its revenue could reach $350 million in 2006, which would mark 75% total growth from 2004 and 32% year-over-year growth.
The company also has a solid balance sheet, with nearly $300 million in cash and debt of $200 million, which is convertible at $29.40 and costs the company $2 million a year in interest payments. However, Akamai's $105 million in 2005 EBITDA (earnings before interest, taxes, depreciation and amortization) covers its interest payments a comfortable 50 times, and the company's cash balance should continue to grow, with only $40 million to $50 million in capital expenditures likely in 2006.
Even so, we believe current valuation reflects lofty growth expectations. The stock is trading at nearly 12 times analysts' 2006 sales forecasts and 50 times analyst earnings estimates for 2006. While Akamai is forecast to grow EPS by 79%, and therefore trades with a PEG ratio (price/earnings ratio divided by year-over-year earnings growth rate) of less than 1, the recent drubbing of
following a roughly in-line earnings report is evidence that the market will not pay high multiples for anything less than perfection. This creates what we view to be an unfavorable near-term risk/reward scenario that requires patience.
We are adding Akamai to our radar screen, and will wait for our $25-a-share price before adding the stock to the model portfolio.
Michael Comeau is a research analyst at TheStreet.com. In this role he performs stock analysis for Action Alerts PLUS and Stocks Under $10. He is also a regular contributor to RealMoney.com.
William J. Gabrielski is a research analyst at TheStreet.com. In this role, he works closely with Jim Cramer and conducts extensive stock research for Action Alerts PLUS.
Richard Suttmeier is president of Global Market Consultants, Ltd., chief market strategist for Joseph Stevens & Co., a full service brokerage firm located in Lower Manhattan. At the time of publication, he had no positions in any of the securities mentioned in this column, but holdings can change at any time. Early in his career, Suttmeier became the first U.S. Treasury bond trader at Bache. He later began the government bond division at L. F. Rothschild. Suttmeier went on to form Global Market Consultants as an independent third-party research provider, producing reports covering the technicals of the U.S. capital markets. He also has been U.S. Treasury strategist for Smith Barney and chief financial strategist for William R. Hough. Suttmeier holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from Polytechnic University. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback --
to send him an email.
Alan Farley is a professional trader and author of
The Master Swing Trader
. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback;
to send him an email.
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