Akamai (NASDAQ:AKAM): Downgrading to Neutral from Buy - Merriman

Merriman Curhan Ford is downgrading Akamai (NASDAQ:AKAM) to Neutral from Buy based on valuation.

The stock is up 80% this year and has reached Merriman's valuation range of $40-48. While the fundamentals should continue to improve, they believe the stock is already reflecting the potential upside to estimates in 2010 and 2011.

Consensus estimates are likely to see upside from improving pricing and volume trends in the Media & Entertainment (M&E) vertical. Merriman notes their revenue estimates are ahead of consensus and they acknowledge that both have room for upside. Feedback from a recent content delivery summit and from competitors indicated that online video delivery pricing declines have moderated and volume growth has accelerated. During 2010, pricing is expected to decline 20%, a moderation from the 40% decline experienced in 2009, while volume (in bits) is expected to grow 45% in 2010, up from 30-35% in 2009.

Valuation likely already capturing the upside in financials. Currently, the stock is trading at EV/EBITDA of 15.9x (FY10E) and 14.1x (FY11E) with EBITDA growth of 18% and 13%, respectively. On a P/E basis, the stock is valued at 32x and 30x, respectively. Even with some upside in estimates, the firm does not expect the valuation to get attractive enough to see a further 20% or more upside in the stock. Also, margins are not likely to expand from currently levels, hence, the EBITDA and EPS growth will move in lockstep with revenue growth. With nearly $1.0B in net cash, the company could make accretive acquisitions that would accelerate growth further and justify higher valuation multiples.

Notablecalls: Merriman's Richard Fetyko upgraded AKAM back in March when the stock was around $27-28 and is now downgrading it at $44 or over 15 pts higher. That's a nice call.

For the sake of objectivity, Fetyko did downgrade AKAM to a Sell back in Oct 2009 when the stock was at $18 only to upgrade it back to Neutral on Feb 2010 when it was at $26.

I watched Amazon.com (AMZN) get hurt on a Susquehanna downgrade yesterday morning, which leads me to think AKAM could see some selling here as well. Furthermore, AKAM is up way more than AMZN over the past months, which could contribute to selling pressure.