Tuesday, April 08, 2008

Ride The Wave

Dan Rayburn has another nice article out this morning, this one detailing his recent visit to Akamai Technologies (NASDAQ: AKAM). It's generally very positive about the company, and given Dan's readership, I wouldn't be surprised to see a nice bump in the stock today, all other things being equal.

In past discussions with Akamai, management has hinted to me that most of the analysts covering the stock don't completely "get" its business model and in particular, its sustainable advantages. To do so requires a fair amount of technical acumen, and so I'm not surprised.

I do not see Akamai being disrupted in the short-term. Dan does a nice job in his piece of dispelling the myth of a CDN price war that has kept a lid on its stock price over the past couple of quarters. Certainly others such as Limelight Networks (NASDAQ: LLNW) and Level3 (NASDAQ: LVLT) can deliver content more cheaply, but not at the service levels many clients require. Really, it's in the [delivery x service] product where Akamai shines.

One day, transit bandwidth may be an order of magnitude cheaper, and everyone will have 100 Mb/s or more of sustained bandwidth entering their homes (I wish). But that time is far off in the future. As long as Shannon's Law holds, and people continue to ramp their media consumption via the internet, there will be a need for the kind of optimizing technology Akamai provides.

In the intermediate term there's nothing I see that would indicate severe headwinds for Akamai. They recently won an intellectual property suit against Limelight, and in general have a solid IP portfolio. They are the market leader, have very high profit margins, and continue to dominate the high end for CDN and application acceleration services, both of which are expected to enjoy double digit growth rates in the coming years.

My view is that they're currently undervalued (though not drastically) and should enjoy steady appreciation for some time.

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