Is Akamai Oversold?

With shares of Akamai Technologies (NASDAQ:AKAM) trading at around $35.26, is AKAM an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Akamai was recently slammed after missing on the top line and offering weak guidance, but are investors overreacting to this news? Let’s cover the basics first. Q4 revenue came in at $378 million versus a consensus of $381.4 million. That’s the bad news when it comes to revenue. The good news is that this was still a 17 percent increase year-over-year. Q4 EPS came in at $0.38, which was a moderate improvement over the $0.33 we saw for the quarter last year. FY2012 revenue came in at $1.37 billion, which was yet another improvement. FY2012 EPS was $1.12. You guessed it — another improvement.

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Missing expectations hurt the stock, but weak guidance was the ultimate culprit. Akamai expects Q1 revenue to come in between $352 million and $362 million. This was below Wall Street expectations of $369.8 million. However, this would still be a significant improvement year-over-year.

There’s a lot of talk about weakening demand and competitor margins increasing, but Akamai is still the strongest player in this space.

Let’s take a look at some important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Strong  

The debt-to-equity ratio and balance sheet for Akamai are superb. An investor in Akamai will clearly sleep better at night than an investor in Level 3 Communications (NASDAQ:LVLT).

Debt-To-Equity

Cash

Long-Term Debt

AKAM

0.00

$465.17 Million

$0

LLNW

0.00

$129.96 Million

$1.31 Million

LVLT

7.23

$793.00 Million

$8.77 Billion

 

T = Technicals on the Stock Chart Are Weak    

Akamai had been sailing along up until February 7. If you’re looking at the big picture, then Akamai has performed almost in-line with the S&P 500 over the past three years. Akamai has outperformed Level 3 Communications and Limelight Networks (NASDAQ:LLNW) over a three-year timeframe.

1 Month

Year-To-Date

1 Year

3 Year

AKAM

-13.54%

-13.84%

4.75%

39.22%

LLNW

-0.87%

2.25%

-41.94%

-33.82%

LVLT

-1.29%

6.06%

25.11%

23.47%

 

At $35.26, Akamai is trading below all its averages. Only two days ago, Akamai was trading above all its averages.

50-Day SMA

39.66

100-Day SMA

38.71

200-Day SMA

35.78

 

E = Earnings Have Been Steady           

Earnings and revenue have been improving on an annual basis for several years. There was one small hiccup with earnings in 2009, but that was a challenging time for most companies. Top-line growth has been very consistent.

2008

2009

2010

2011

2012

Revenue ($)in billions

790.92M

859.77M

1.02

1.16

1.37

Diluted EPS ($)

0.79

0.78

0.90

1.07

1.12

 

We already know what happened this quarter. Now let’s take a look at the last few quarters as well.  

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in millions

281.86

323.74

319.45

331.31

345.32

Diluted EPS ($)

0.23

0.33

0.24

0.24

0.27

 

Let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Support the Industry

Let’s keep in mind that Akamai still delivers content for some of the biggest sites in the world. Akamai routinely delivers between fifteen and thirty percent of all Web traffic! Those sites rely on Akamai to keep everything running at all times. Also, cloud computing and Internet video are still in their early stages, and Akamai is still well-positioned to benefit from those trends.

Conclusion

Let’s add to the positive tone already evident in this article. Akamai has solid margins, strong cash flow, a superb balance sheet, consistent growth, and a Forward P/E of 15.40. In addition to that, the company announced a $150 million extension of its share repurchase plan, which will begin on February 13, 2013. As if that’s not enough, Akamai unveiled new products and made strategic acquisitions last year.

On a fundamental level, you’re not going to find many stronger companies. Akamai is a long-term OUTPERFORM.

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