The potential here is awesome, as is the continued regularity and dependability of the huge year over year growth. Check out the free cash flow and how much of new revenue drops directly to the bottom line. The multiple is for growth – large steady growth.

I too believe that the way this has been reported in the headlines “earning slump” etc. is terribly misleading. I keep track of the writers I can trust and who back up their headlines with meaningful explanation. You will not see a stampede of institutions or insiders waiting in line to sell this stock – quite the contrary – they will be picking up any stock from the poor retail investors you (and the several misleading headlines) managed to scare into selling.

We can disagree on how to look at the earnings or the future earnings or the future future earnings, but I’m going to stand by my opinion that the valuation is too high. A year from now we can follow up and see if I was right or wrong, but for now I won’t pay these multiples for growth that is still several years away.

If there was a chance to make a 10X return on my money, I’d be much more open to assuming the inherent risks with Akamai, but at $7+ billion what’s really the upside vs. how much could potentially go wrong?

As to my comment about waiting until next year . . . IF Akamai executes and IF they continue their guidence and IF they can get to a point where $200 – $300 million in earnings is a realistic possibility, then I’d like the stock at TODAY’s prices. I don’t see them coming anywhere close to that level next year or even the year after, but someday in the future Akamai MIGHT be worth $7+ billion in anticipation of their future earnings, just not today. If it runs up as their earnings continue to come in, then I’m not interested in the stock. Opportunity is a lot easier to replace then cash.

We can agree to disagree on the valuation and on whether or not the average investor is using Yahoo finance for their due dilligence or if they are paying to get the high priced analyst research, but if my post demonstrates anything it’s that this is clearly not a black and white issue and with Yahoo Finance now showing a P/E of 125, I think a lot of retail investors are going to be shell shocked when they realize that they don’t own a company with a p/e of 25.

I won’t follow the herd, but I will agree with you though, that Wall Street loves this stock. Clearly there are people far more qualified then I who’ve fallen very much in love with it. Of the 14 analysts that rate it, only one has a sell. I can’t vouch for your 80% number, but it wouldn’t surprise me if it’s right. It is worth noting though that based on the 13 million shares that traded hands on Friday, there were at least a few institutions who took some profits. If that trend continues, you can bet that Wall St. will take a second look at this as well.

Remember that 80% of AKAM’s stock is owned by institutions so the “average” investor isn’t looking at Yahoo finance. These analysts have always accounted for stock based compensation well before SOX came into effect. If they didn’t we would have seen quite a big tumble in the market this year as numbers came in this year w/options expense. Stocks ultimately trade on free cash flow…earnings are just a normalized way of looking at free cash flow…Again I encourage you to build a free-cash flow model, and I think you’ll start to see the 7 billion number make sense.

I don’t really understand your comment “Maybe in a year when we look at their future p/e, we can talk about a more reasonable valuation” The reason the multiple today is high, is because 1,2,3 years from now the 87 cents in earnings (consensus numbers) becomes $2, $3 $4 in earnings. Most analysts are pricing Akamai off their one or two year earnings or free cash flow number and then applying a multiple to that number based on their expectations for growth beyond their forseeable view. We can argue what multiple is justifiable, but the idea I’m getting at is that a stock doesn’t become worth more or less just becuase we wait a year. As future expected growth slows, the multiple will compress, but the earnings base will be larger. The reason Akamai is trading at 7 billion dollars today is because there are implicit expectations for what Akamai will return well beyond 2008. The institutions that control 80% of the float are the ones really trying to figure out what the earnings potential of Akamai is.

Don’t get me wrong–I enjoyed your article.

@ Chim Juice – My record speaks for itself, I’ve always disclosed any conflicts and always will, my long time readers know this. Since you are obviously long AKAM, I’ll cut you some slack, but look at my history before making such crazy allegations. Furthermore, even if I did own a short on AKAM (which I don’t) your beef shouldn’t be with me, but with my argument, if you can give me a business model that justifies a $7 billion + valuation then I’m all ears, in the meantime if you want to take unsubstantiated shots at my ethics, that’s your right, but it won’t hold much weight with the readers who have been following my coverage of the VOD and tech market for the last three years. It’s easy to blame the messenger, but what about the message?

I think some of you journalists are just trying to scare amateur investors into selling on good earnings with your distorted focus and emphasis on just the net income numbers. (Either that or you guys need to bust out your econ books or talk to some CPAs.) And with the institutionals owning the vast majority of outstanding shares (and I expect they know better about these 1-time earnings or expenses), the individual investors hardly matter to the grand scheme of price movements.

Short of having insider’s information, do you want to know a good method for predicting/double-checking the health of AKAM’s growth? Monitor the earnings report of their big customers (i.e., Apple, MSFT, Comcast, Amazon, anti-virus companies, etc.), if they start reporting bad numbers then that will be the first signs that AKAM’s growth is slowing. Plus until Akamai’s revenue from Qtr to QTR drops back to back, the stock price will continue to rise. With the latest reporting from Akamai management, they are clearly telling the street that they expect an upward growth in revenue. And that is good news for investors. Even better if you got scared into selling while the share price dropped, but I think it is now another good buying opportunity.

Just want to add this too, AKAM is not selling bandwidth (just like Apple is not pricing their iPods based on the falling price of flash memories), they never did price their service based on commodity pricing of bandwidth, they are selling their expertise on intelligently delivering data packets to the end users over the Internet and pricing it accordingly. Sure these customers can channel some of their resources to build their own network to deliver the same content, negotiate the low bandwidth costs with ISPs and manage it in-house or they can focus on what they do best (run their own business) and pay to leverage Akamai’s global network and their years of expertise.

P.S. SEC should really look into not just if these reporters owns the stocks they write/cover, but if they have any positions on the stock at all(e.g., short or long positions).

Also, of course their price to book value is low. All they own is a bunch of servers. Its the technology and software they’ve built around them that makes them worth 7 billion dollars.