Just when Robert Metcalfe was predicting that the Internet would collapse, Akamai came along, and, like the Pied Piper who rid Hamlin of its rats, rid the Internet of its bottlenecks. But how healthy is the stock today?

To see the numbers on which this analysis is based, choose between the MS Excel version and the HTML version.

by Manish Aurora of www.rationalinvesting.com [February 2, 2001]

Akamai Technologies, Inc. (AKAM) was once seen as so compelling an investment that Wall Street analysts created a verb out of its name. Just when Robert Metcalfe was predicting that the Internet would collapse, Akamai came along, and, like the Pied Piper who rid Hamlin of its rats, rid the Internet of its bottlenecks using software wizardry.

The stock went to $200 on the first day of trading. Mesmerized investors may have sacrificed their college funds, if not their first-borns. AKAM is down 90% from its peak.

Akamai offers efficient routing for rich content and streaming video and audio, and sells other applications that improve Web site speed and quality. Akamai controls 70% of the market for content delivery.

Competition includes Digital Island, and Inktomi's and AOL's recently launched Content Bridge [see our analysis of Inktomi here], which creates a trading mechanism for content on top of a routing network. Another competitor is Cidera, which is pushing the use of satellites for distribution. Despite the slowdown in venture money, content delivery companies continue to start up and grow in response to the insatiable demand for efficiency.

The piper is being paid
For the quarter ended 12/00, revenues were $37 million, up from $27 million in the prior quarter. From a standing start in 1999, Akamai is growing rapidly. Cash flow, however, was negative $80 million, with both spending and capital expenditure outstripping revenues.

Akamai has excellent management and engineering. It has grown to a global network of 8000 servers. Customers identify and tag portions of their content that requires significant bandwidth. These tagged items are delivered over Akamai's dedicated server network, rather than generic IP bandwidth.

Akamai's technology routes the request for tagged data to the server that is best able to deliver, based on geographic proximity and available capacity. The company uses real-time monitoring and dynamic server load management, reacting to congestion by rerouting traffic instantly, and user connection management, mapping the location of users for efficient delivery.

This service is marketed as FreeFlow. Monthly usage charges are based on megabits per second of content delivered. Customers commit to a minimum usage level over a fixed contract term, and pay additional fees when usage exceeds this commitment.

As a result of its acquisition of Network24, Akamai also delivers interactive broadcasts. This enables Website owners to create customized programs of audio and video content, synchronized PowerPoint presentations, audience polling, and eCommerce capabilities. EdgeAdvantage is an integrated platform of Akamai's core technologies and network infrastructure used to offer FreeFlow and FreeFlow Streaming, often combined with third party tools. The company also markets MediaPlus, a system for rich advertisements.

Bottom line
The stock, despite its steep fall, is not yet cheap. The large server network increases the volatility of the business model. While it will prove to be a source of competitive advantage, it raises the bar on the growth levels necessary to make the firm successful.

Our model prices it at around $25, close to its market price. This is despite a not-very-high Beta (risk factor) of 1.5 for a firm still burning cash. Inktomi, which we wrote about recently, has half the market capitalization for higher revenues and far lower capital expenditure needs. The residents of Hamlin have not quite figured out what hit them, yet.

Important notes
The methods on which this report is based are described in "Pricing A Stock."

Please also read the disclaimer.

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