News Analysis date published New: 
Thursday, August 2, 2012 - 12:30
New Date created: 
Friday, August 3, 2012 - 13:36
New Date last updated: 
Thursday, August 2, 2012 - 12:30

This Little-Known Hi-Tech Stock Could Return 81%

Thursday, August 2, 2012 - 12:30pm

Secular investment opportunities don't come around very often. Think about Microsoft Corp. (Nasdaq: MSFT) or Cisco Systems (Nasdaq: CSCO) in the 1990s. Both companies saw huge gains as the infrastructure for a high-tech world was being paved. Any investor with the vision to see how networking equipment and operating systems would be critical to the global communication network made a lot of money.

Fast-forward to 2012, and a similar investment opportunity has started to develop.

This time the focus is around cloud-computing, where the next generation of great technology companies is hard at work developing systems to increase speed and storage capacity across the information highway. Cloud companies are set to see huge gains during the next 10 years, as consumers and corporations alike push the limits of data consumption and transmission across a limited amount of bandwidth.

But even though many companies are likely to benefit from this long-term trend, there is one in particular that stands out amongst the crowd. In the past five years, earnings and sales of this little-known tech company have more than doubled, while shares have remained at almost the same price since 2007. Take a look at the chart below.

The company I am talking about is Akamai Technologies Inc. (Nasdaq: AKAM), a leader in cloud-computing services with a market cap of $6.4 billion. Akamai's primary source of revenue is its cloud infrastructure services, where it maintains a vast network of servers designed for storage and data transmission. Sales in this segment totaled about $192 million the second quarter, or 58% of total revenue for the period. This distributed architecture enables the company's customers to manage Internet traffic and data transmissions more effectively during times of high use, without making expensive investments in hardware and labor resources. Akamai also offers additional services, including Internet accelerators and security packages.

The popularity of Akamai's products and services shows up in an impressive list of clients that includes 29 of the top 30 global media companies, all 20 of the world's top e-commerce sites, 90 of the top 100 online U.S retailers, seven of the top 10 banks wordwide and nine out of the top 10 pharmaceutical companies in the world.

But just because Akamai has already established itself with some of the top brands in the world doesn't mean its growth story is over. In fact, it is just getting started. Looking forward, the cloud-computing revolution is in the first inning.

Bull case for Akamai
In spite of its recent success, Akamai remaining an aggressive player, releasing seven new products this year alone and completing two new acquisitions. But this is no Groupon Inc. (Nasdaq: GRPN), which sacrificed margins and earnings growth for sales, and saw its shares dive 46% lower in the past six months. Akamai's second-quarter earnings, on the other hand, grew at a faster pace than sales as it remains focused on profitability and operational strength.

The company is also a financial fortress, with more than $1 billion in cash on the balance sheet to invest in new products and tap into new markets. Speaking of new markets, Akamai continues to see impressive sales growth on the international front, with second-quarter sales up an impressive 17% from last year, even after excluding currency fluctuations. The company experienced positive growth trends in Europe and Asia pacific.

Besides it's impressive financial performance, Akamai is also demonstrating it believes in its own growth story. During the second quarter, the company returned value to shareholders by repurchasing 2 million shares of its stock for $67 million. This brings total buybacks for the company in the past year to 20 million shares, or $558 million, representing more than 10% of the total value of the company.

Finally, there is a very bullish trend in cloud-computing that will likely continue to support Akamai. Corporations are increasingly outsourcing critical data management activities to industry specialists, because it enables companies everywhere to reduce expenses and increase operational efficiencies. Outsourcing these services also enables them to streamline human resources obligations. Outsourcing in general is big business, and this trend is thriving in technology and cloud infrastructure.

Risks to Consider: Technology is a highly innovative, fast-moving industry that is notorious for having low barriers to entrance. This exposes successful, market-leading companies with new companies that have figured out how to do something better, faster or cheaper. Google (Nasdaq: GOOG) clipping YAHOO's (Nasdaq: YHOO) wings is a great example of that. Although Akamai looks well positioned to gain from the cloud-computing trend, new competition is always something to consider when investing in technology.

Action to Take --> Akamai is a leader in one of the hottest areas of technology. The company continues to see rapid earnings growth through its multiple product channels and a global market. If shares were to return to just half the high forward price-to-earnings ratio of 56 times in the past 10 years, the stock would jump to $65, a sharp 81% increase from the current price.

Michael Vodicka does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of MSFT, GOOG, CSCO in one or more of its “real money” portfolios.