Online Video Beneficiaries: Akamai

In my series on Online Video Beneficiaries, I have covered the network players like Cisco. In this post, I will look at the application acceleration angle. Gartner estimates that the market for application acceleration will exceed $3 billion by 2010. There has been a meteoric rise of online traffic with the online broadcast of live events and the popularity of devices like iPods and iPhones and the resulting boom in downloading as well as uploading of music and videos. A major beneficiary of this surge in online traffic and multimedia activity that requires fast and reliable transfers is Akamai.

Akamai Technologies(NASDAQ: AKAM) is the leading content delivery network (CDN) provider that accelerates the delivery of content and applications over the Internet. With the Internet playing a major role in everyday life and applications, Akamai’s business is booming. Its annual sales in 2006 went up 51% to $428.7 million and have more than doubled over 2004. It acquired one of its biggest competitors, Speedera in June, 2005. It followed this up with Nine Systems in December 2006 to build out its video serving capability. In March 2007, it acquired Netli to expand its application acceleration technology as well as its presence in the Software-As-A-Service (SAAS) market. In April 2007, it bought Red Swoosh to enhance its distributed Internet presence.

Akamai offers three core solutions: Digital Asset Solutions, Dynamic Site Solutions and Application Performance Solutions. Its Digital Asset Solutions are designed to overcome the challenges of peak online traffic and large file sizes. The Akamai EdgeSuite Delivery Solution accelerates the delivery of websites over the Internet by making the content accessible across its international network of servers. Other popular solutions following this model are Akamai Media Delivery Solution for media companies and Akamai Electronic Software Delivery Solution for software companies launching new products.

Akamai’s Dynamic Site Solutions are designed for accelerating business-to-consumer websites that integrate rich, collaborative content and applications into their online architecture. These solutions are used by retail and travel companies. Its Application Performance Solutions are designed to improve the performance of highly dynamic content common on corporate extranets and wide area networks.

For Q2 fiscal 2007, Akamai reported revenues of $152.7 million, up 52 % year-over-year. GAAP net income was $21.6 million, or $0.12 per diluted share, a 92 % year-over-year increase. Its customers under recurring revenue contracts also increased from 2,060 in June 2006 to 2,555 in June 2007. It is currently trading around $29 and hit a 52-week low of $27.75 on 28 September. Earlier this year in February, its price went up to $59.69.

So why this kind of punishment for the stock? Unrealistic expectations is one reason. Competitors creeping up is cited as another. Akamai owns over 50% of the CDN market, which continues to grow, and my general impression is that this is a GREAT company, playing in a GREAT market, and the recent slaughtering creates a very nice buying opportunity for investors. Just look at the phenomenal growth rates!

This segment is a part in the series : Online Video Beneficiaries