Risk of Lower Akamai Growth

Akamai Technologies, Inc. (AKAM - Analyst Report) continues to post growth, as demand for bandwidth heavy applications and media grow, which should continue for the foreseeable future. Moreover, the company has a strong patent portfolio and has essentially eliminated a chief competitor through infringement litigation.

However, with broadband access well penetrated into the online user base, traffic growth has begun to decelerate. Moreover, AT&T’s (T - Analyst Report) announcement that it would spend $70 million to bolster content delivery indicates that the market is becoming more competitive. We therefore maintain a Hold recommendation on the shares of AKAM.

Akamai is currently trading at 26.8x our 2008 EPS estimates and 7.3x our 2008 revenue estimate. Although the valuation has fallen to the low-end of historic levels, we would not yet be buyers of the stock given what we believe is risk of a decelerating growth rate.

The company has guided for 28% revenue growth at the mid-point in 2008, which although an impressive rate, it is unlikely to be enough to raise the valuation significantly. We maintain our $37.50 price target, representing a P/E multiple of 28.4x and a P/S multiple of 7.7x 2008 estimates, which we believe is a reasonable valuation for a high growth stock and represents a P/E to growth (PEG) ratio of approximately 1.

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