Evaluating the fast growing companies delivering internet content…

AKAM: 41.57

LVLT: 1.46

LLNW: 8.03

A good company can be chosen by picking out an attractive industry, and deciding who the industry leader is. Sometimes it is easy to pick out the industry leader, and other times not. What can be hard is deciding how much you want to pay for an industry leader.

I want to get a piece of the emerging industry developing for internet content providers and distributers. Many of these companies have extremely high valuations, but I personally think they are warranted. The internet is being used to stream movies (Netflix), watch video, consume content, and stream music. As such, there is a huge demand for fast and secure delivery of this content. I decided to start my research of finding these companies by seeing which companies Netflix uses to distribute their content. Limelight Networks (LLNW), Akamai Technologies (AKAM), and Level 3 Communications (LVLT) share a deal with Netflix for usage of their custom software and hardware solutions to deliver all of the streaming movies Netflix offers. I then decided to compare these companies against each other to see who has the greatest investing potential.

Limelight Networks (LLNW)

Company Description – Yahoo! Finance

The company delivers content for traditional and emerging media companies or content providers, including businesses operating in the television, music, radio, newspaper, magazine, movie, videogame, software, and social media industries; online businesses operating e-commerce storefronts; and government organizations and corporate or enterprise businesses that operate a Web site.

Key Ratios

No Debt

Exp Growth for next 5 yrs: 14.25%

38% increase in price YTD

57 Million of cash equivalents

EPS of .01 in 4th quarter (first profit in company history)

Outlook

LLNW is one of the lower tier companies along with LVLT in the content distribution industry. The clear leader in this industry is the dominant Akamai Industries. However, many companies that sign deals with the content distribution industry do not like to rely on only one deal. This is why Netflix has all three of these companies signed to a deal because they simply don’t want to put all of their eggs in one basket. This opens up an opportunity for LLNW and LVLT to gain some market share away from AKAM, and the growth of this industry certainly gives them a chance.

Level 3 Communications (LVLT)

Company Description – Yahoo! Finance

Level 3 Communications, Inc. engages in the communications business in North America and Europe. It offers network and Internet services, including transport services, high speed Internet protocol services, dedicated Internet access, virtual private network services, and dark fiber services, as well as managed modem, an outsourced, turn-key infrastructure solution; and colocation services.

Key Ratios

P/S: .67

Growth next 5 years: 4%

48% increase in price YTD

Negative Free Cash Flow

Outlook

For being in such a high growth industry, this company looks rather stagnant to me. The company CEO explained how well positioned the company was for this growth, however, still issued guidance of only 2% increase in revenues for 2011. Of course, the stock is very cheap (trading around $1), so it may pay to take a small share in this company and hope that they can gain some market share.

Akamai Technologies (AKAM)

Company Description – Yahoo! Finance

Akamai Technologies, Inc. provides services for accelerating and improving the delivery of content and applications over the Internet in the United States and internationally.

Key Ratios

No Debt

15% growth next 5 years

ROE: 8.74%

Profit Margins: 16%

S&P 5 Star Stock

Outlook

Akamai Technologies is the leader in the industry. They have many high profile customers, and they demand high prices from them. This could potentially spell harm for AKAM because their prices could be undercut by LVLT and LLNW. AKAM recently had a huge drop in stock price because the CEO issued SLIGHTLY smaller guidance for year 2011. This may present a good opportunity to snag an industry leader at a lower but expensive price.

 

While all of these companies have something to offer as far as growth potential, I would rather invest in the already established Akamai Technologies. However, with such a high price, I am worried that the smaller competitors could grab just enough market share to keep AKAM from zooming ahead. I have decided that if I invest in this industry, I would buy shares in ALL of these companies, with a little more money devoted to AKAM. This way, I will be able to capture the growth potential of the industry without exposing myself to the risk of one single company.

 

*I have no positions in the stocks mentioned

If you could only use one ratio to analyze a stock, what would it be?

This is a question I was asked at a job interview recently. I responded by saying that the PEG ratio encompasses the most information in it.

For those unfamiliar, the PEG ratio is the P/E divided by the growth rate. This is very important because it puts a firm’s P/E Ratio into perspective. Many people will look at a high P/E ratio, of say 44, and immediately write it off as overvalued. However, if the growth rate of the company is expected to be 50% a year, than this high P/E is justified.

A PEG ratio of 1 or under is considered to be very favorable. Even a PEG under 2 could be considered favorable. I just don’t understand how some people can cite a company’s P/E ratio without even looking at the growth prospects. This is why the PEG is my favorite ratio of a firm’s valuation.

I would like to hear some other opinions on the most important ratio to look for in a stock…please comment!

 

50 Cent facing possible SEC investigation…

50 Cent took a huge position in the penny stock H&H Imports a few days ago and used his twitter account to promote the stock, an illegal technique many of you may know as the “pump and dump.” With the millions of followers that 50 cent has, he generated a profit of OVER 8 MILLION DOLLARS! H&H Imports has lost significant amounts of money since its inception, but the stock soared due to 50 cent encouraging his followers to buy the stock.

Wow, if an everyday person or wall-street banker did this they would face years in prison in addition to giving up a huge penalty and fine. Something tells me because of 50 Cent’s status he will get out of this by only surrenduring his profits, but i hope to god he gets a steep penalty and we can all laugh at his stupidity!

More information on this story can be found here:

http://www.huffingtonpost.com/rj-eskow/which-is-more-gang……

 

Activision (ATVI)

As a gamer myself, this is a prime example of investing in what you know. I sure know video games, and Activision produces my favorities: Call of Duty, World of Warcraft, StarCraft, Diablo, Guitar Hero. There has been an uptrend in Activision’s price lately which may deter long term investors to consider it. However, this baby has much more room to grow. With the acquisition of Bungie Studios (They created the well known Halo franchise), there will be plenty of smash hits to come. And they certainly will still make cash off of their monthly payment World of Warcraft business model ie. their cash cow. What really puts this stock over the edge in terms of investing in it right now, is that I think Call of Duty: Black Ops will break an all-time sales record to surge its fourth quarter earnings over the conservative estimate of .50 (last year it was .49). I call this conservative because if they made .49 last year, than this year HAS to be much better. Call of Duty : Black Ops has about 1 million people logged online AT ANY TIME. This is much more than the amount of people I saw playing on last years Modern Warfare release. Also, they have revenue coming in from World of Warcraft : Cataclysm, and StarCraft 2. I think its time to jump into this stock before the big earnings pop that I am expecting because that will send its price spiraling higher.

*I own shares in ATVI, please consult your investment advisor before making any investment decisions

Book Review: Devil Take The Hindmost by Edward Chancellor

I was recently assigned this book to read for a class of mine (Money and Banking), and to tell you the truth I honestly didn’t think this book would be anything special.

The book goes back through the history of financial speculation and economic bubbles to give the reader an idea of what caused them and how the economic mood was at the time. In fact, after about half way through, I started to make connections of past bubbles to our most recent economic collapse. Speculation is described by Chancellor as a frenzy and social phenomenon. For instance, the very first representation of asset speculation began with the Dutch speculation of tulips (of all things!). Tulips were considered a “rich man’s” flower, and to own a tulip signified wealth. As more and more people began to buy tulips to show that they were wealthy, it began to spread to all the other social classes. Thus raising the tulip prices to absurd amounts. Today, the rise in gold prices may be somewhat similar to what happened with the tulips. Gold commercials are on television 24/7 encouraging your average everyday investor to devote a part of his/her portfolio to gold. Gold does have intrinsic value, but the minute your “average investor” starts to realize that the increase in it’s price has stopped advancing, a large sell off may occur drastically reducing its price similar to the tulip mania.

I think that every investor (novice or advanced) should have a basic understanding of financial history and speculation to get an idea of how bubbles are formed and how to avoid them. This book does just that, and I would recommend it to any person interested in working in finance.

Pfizer (PFE)

Pfizer (currently trading around 17.50) has a lot of good things going for it: Lots of cash, a low P/E, and big margins to name a few. However, it is facing some serious pressure to find a new cash cow drug to replace lipitor. Considering how high this stock once used to be, many people consider it a good value play. I think that Pfizer will eventually develop some new drugs, but I dont see their price skyrocketing to where it once was.

Here is how I see it:

Current: 17.50

Upside price: 25.00

Downside price: 13.00

Quite simply, this is a very mediocre investment choice, and I think there are plenty of other value companies out there that provide higher upside with less downside risk. With a PEG of 2.45 (Yahoo Finance), it looks as if the optimism towards Pfizer finding a lipitor replacement has already been priced in. This is why I don’t think that there is much upside for the stock. And if Pfizer continues to be a stagnant company as it has been the past few years, than it has room to fall.

Finally, I would like to address the recent step-down of their now former CEO Jeffrey Kindler. Kindler said that the decision to retire was based on “the exhausting demands of the job.” This seems a bit sketchy to me. It points to the fact that Mr.Kindler didn’t have much optimism about the company, and that he just gave up on Pfizer itself. Of course it is a difficult job to please shareholders, but I think Mr.Kindler saw something in the company that made him think that there is nothing he can do to change the lackluster performance from Pfizer’s stock. To me, this is a red flag.

*I own shares in PFE

Tesla Motors (TSLA)

Current Price: 31.49

IPO Price: 17.00

When a company takes its shares public it’s basic knowledge that they will try to price the shares as high as possible to raise cash for the company. So usually this means that an IPO price is either fairly valued or overvalued due to this fact. Now take a look at the price today of TSLA. Its about 80% above its IPO price in such a short amount of time.

Of course, a higher price can always be warranted. So let’s take a quick look at Tesla Motors.

The company has never had a profitable quarter. So that’s not a good start. The company currently sells a roadster vehicle for $100,000. At this price point it is not being sold to the middle market consumer. However, the company is priced at a point where a mass market car producer would be at. Tesla even said itself in a statement that they will continue to pile up losses until at least 2012.

The reason for optimism in the company is due to its design of a Model S car that should have a $50,000 price point and operate on electric. Keep in mind that there isn’t even a complete design for this car and it’s only a prototype!

At this inflated price, it may be best to avoid Tesla as an investment.

 

*I do not own TSLA, and you should consult your investment advisor before making any decisions