A Stock Having a Consistent Revenue Growth

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Feb 24, 2015
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In this article, let's take a look at Akamai Technologies Inc. (AKAM, Financial), a $12.5 billion market cap company, which is a company develops and deploys solutions designed to accelerate, improve and secure the delivery of Internet content and applications.

Several Acquisitions

In 2005, the firm acquired Speedera Networks, with the aim to increase its customer base. At the end of 2006, it acquired Nine Systems, a provider of a solution for rich media production, publishing and distribution. Next, it was the turn of Netli, a provider of on-demand solutions for accelerating the delivery of content and applications. In that 2007, it continued with Red Swoosh, a developer of peer-to-peer management and distribution software.

In 2010, it acquired mobile platform solutions company Virtua. In 2012, AKAM bought plenty of businesses. The list includes Blaze Software, Cotendo, FastSoft and Verivue. In 2013, it acquired Prolexic Technologies.

Liquidity

Akamai has a debt-to-equity ratio of 0.21% which is considered very low, and is higher than the industry average. Further, a good quick ratio demonstrates the ability of the company to cover short-term needs.

Revenues, Margins and Profitability

Looking at profitability, revenues rose by 23% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.54 vs $0.44). During the past fiscal year, the firm increased its bottom line. It earned $1.84 versus $1.61 in the previous year. This year, Wall Street expects an improvement in earnings ($2.66 versus $1.84).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
AKAM Akamai Technologies 12.01
BIDU Baidu Inc. 29.47
P Pandora Media Inc. -5.72
YHOO Yahoo! Inc 32.95
LNKD LinkedIn Corp. -0.54
Industry Median 6.26

The company has a current ROE of 12.01% which is higher than the industry median. Also, it is higher than the one exhibit by Pandora Media (P, Financial), and LinkedIn Corp. (LNKD, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Baidu Inc. (BIDU, Financial) and Yahoo! Inc. (YHOO, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

Year ROE (%)
Dec05 131.65
Dec06 7.27
Dec07 8.73
Dec08 9.92
Dec09 8.82
Dec10 8.74
Dec11 9.27
Dec12 9.06
Dec13 11.80
Dec14 11.98

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 40.3x, trading at a discount compared to an average of 50.6x for the industry. To use another metric, its price-to-book ratio of 4.4x indicates a premium versus the industry average of 3.47x while the price-to-sales ratio of 6.9x is above the industry average of 2.69x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $27.750, which represents a 22.7% compound annual growth rate (CAGR).

http://www.gurufocus.com/chart/AKAM#&serie=,,id:per_share_eps,s:AKAM&log=0&per=0"> src="http://chart.gurufocus.com/1424800019095.png" />

As we can appreciate, it has demonstrated a pattern of positive EPS growth over the past years.

Final Comment

In a highly competitive industry, Akamai keeps innovating to retain its customer base. Recent acquisitions have helped to Akamai's base of technologies related to its areas of focus. We believe those acquisitions should contribute to revenue growth.

The PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.

Hedge fund gurus like Louis Moore Bacon (Trades, Portfolio) has added this stock in the last quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned