To The Moon

$Akamai(AKAM)$

Today, we'll be analyzing AAMI Technology stock, which dropped over 21% on Friday. I've covered this stock in the past—most recently last summer, likely after a similar decline. Given the significant drop, I figured people would be curious for an update. Additionally, some key financial metrics have changed since my last analysis.

While the stock hasn't quite reached the buy prices I had previously identified—especially not the deep-value recession buy price—I want to evaluate it from a recession-based perspective. Even if we’re not in a full recession, the company's industry may be behaving similarly to past downturns, making that analysis relevant.

Stock Price vs. Earnings Performance

Looking at AI’s overall earnings, we see steady growth without extreme cyclicality. The largest earnings decline I can find is around 14% following the Great Recession—not a major drop. However, the stock price tells a different story.

• During the Great Recession, the stock fell over 80%, though it started from a high valuation (~80 PE).

• In 2011, it saw a 60% drawdown.

• In 2015, it dropped around 50%.

While earnings remained relatively stable, the stock price experienced large fluctuations—creating potential opportunities for medium-term investors. For example, after past crashes, investors who bought during the recovery phase saw returns of 150% to 200%. This makes it an attractive stock for mean-reversion strategies.

Long-Term Growth & Valuation

Over the long term, earnings have grown at about 15% annually. However, if we exclude certain years for a more conservative estimate, the growth rate is closer to 8.77%. Adjusting for share buybacks—since the company has repurchased about 16% of its outstanding shares over the past decade—earnings growth comes out to roughly 7.7% per year. That’s not rapid growth, but it does outpace inflation (~3%).

Given the stock’s tendency for sharp price declines, this may be a better candidate for buying on dips rather than a pure long-term hold. Instead of holding for 10 years and earning ~100% returns, strategically buying during downturns could yield 200% returns over the same period.

Recession Buy Price & Debt Considerations

Historically, the market has sent this stock to very low P/E ratios—down to 7 in 2008 and around 13 in other downturns. Currently, it’s at a P/E of about 12, but history suggests it could go lower. My recession buy price will be based on the 2008 levels.

One notable concern is the company's increasing debt. Since my last video, liabilities have risen significantly. While total enterprise value appears inflated in some sources, I cross-checked figures and found total liabilities are around 50% of market cap. Long-term debt to capital stands at 34%, which is considerably higher than during the Great Recession.

I wanted to double-check that I wasn’t being overly negative in my analysis. If the company had significantly more liabilities this time around, that might explain why the stock dropped to a P/E of 7 or 8. However, after reviewing the numbers, that doesn’t seem to be the case—everything appears fairly comparable.

To adjust for valuation purposes, I’m increasing the stock price by about 34%. Last summer, I had only adjusted it by 18%, so this is a slightly more cautious approach. When a company carries more debt, stock price swings tend to be more extreme—particularly during downturns—since higher leverage can amplify market reactions. This helps explain some of the volatility, though the stock has historically been quite volatile regardless.

Looking back at how the market has treated this stock in previous cycles is useful because these price moves aren’t always aligned with the company’s earnings performance. While we could also check basic earnings trends, they appear relatively steady, so stock price fluctuations seem more sentiment-driven than earnings-based.

Recession P/E Analysis

Now, let’s analyze the recession P/E. The key question is: how does the stock perform relative to its peak earnings? When I last reviewed this stock, we didn’t have a clear peak, but now we do—earnings have declined since my previous update, contributing to the stock’s drop.

Earnings expectations have fallen since my last valuation. Previously, projections were around $6.70 per share, but they’ve now dropped to approximately $6.25 for this year. This illustrates why I wanted to revisit this stock—market sentiment can worsen if earnings expectations continue to decline. However, the previous peak earnings of $6.48 are already locked in, meaning that figure won’t change. This is helpful because, regardless of how much earnings drop in the near term, we have a concrete reference point for what the company has achieved at its peak.

This approach helps prevent excessive pessimism when analyzing downturns. It also prevents buying too early—historical market behavior gives us insight into how low sentiment can push the stock.

To determine the recession P/E, I look at past downturns. Using peak earnings and the lowest stock price from the Great Recession, I calculate how severely the market discounted the stock relative to its peak earnings. In 2008-2009, the lowest stock price was $9.48, and applying that to one of the past peak earnings figures (around $1.32 or $1.35 per share), we can establish a recession P/E.

For this cycle, assuming $6.48 is our peak earnings, we can apply the same methodology to estimate potential downside risk. Historically, the market overreacts during downturns, assuming prolonged weakness even when recovery may only take two to three years. The goal is to capitalize on market overreactions rather than overpaying based on short-term sentiment.

Adjusted Recession Valuation

In 2018, my calculated recession P/E was 6.85, based on the low price and peak earnings during the 2008-2009 period. I then apply a 40% adjustment to that figure to account for extreme negativity in the market. The idea isn’t to pinpoint an absolute bottom but rather to determine a fair price that balances downside protection with the opportunity to buy before the stock rebounds.

At the end of the day, my approach is simple: if the stock gets close enough to my target recession P/E, that’s when I consider starting a position. The assumption is that the company will eventually recover—if it doesn’t, there’s a risk of losing money. However, by waiting until it’s deeply undervalued, the downside is more limited compared to buying in at higher levels, say three months ago.

Right now, the stock price is $76, but I’m factoring in debt and treating it as if it were $102. This adds a layer of conservatism since higher debt amplifies volatility, especially in recession scenarios, where the market tends to react more dramatically. The more debt a company has, the greater the perceived risk. So, I’m building in a buffer on both the positive and negative sides—it may not be a perfect balance, but it helps account for the uncertainty.

The key question is: how far does the stock need to drop to reach that recession P/E of around 9? Based on my calculations, that level is about 40% lower, which means a price target of $46.30. This number remains unchanged even if earnings decline further, making it a more stable reference point. Of course, if something fundamentally disastrous happens beyond macroeconomic trends, that would be a different story. But under normal conditions, this is the price range to watch.

If we use a more standard valuation, the current buy price would be $62—only about 19% below today’s level. However, if earnings disappoint further, that target will keep dropping, which is why the recession-based approach is interesting. In a downturn, traditional valuation metrics can break down, as weak earnings push the buy price lower and lower. But the recession-based target remains fixed once peak earnings are established, regardless of how bad things get in the short term.

The core assumption behind this strategy is that the issue is not company-specific but rather industry-wide or macroeconomic. If that holds true, history suggests earnings will eventually bounce back—sometimes dramatically. For example, in past downturns, earnings dropped 50%, only to surge 150% the following year. This kind of volatility makes it difficult to use a standard steady-growth model, which is why a recession-based valuation helps navigate extreme price swings.

At this point, earnings haven’t collapsed yet, but if they do—say, falling to $5 per share—the stock price will likely take another hit. That’s when the recession buy price will stand out as a more attractive entry point. It might seem overly generous in the moment, but it’s based on historical patterns rather than short-term panic. That’s the essence of being a contrarian—buying when sentiment is at its worst and positioning for a recovery.

Conclusion

Given how this stock has rebounded from deep drawdowns in the past, I think it’s an interesting opportunity at recession P/E levels. If history repeats itself, the potential upside could be significant—possibly a 200% return over five years in the right conditions. Looking at past data, if you had bought in late 2008 (not even at the exact bottom) and held, you’d have seen a 600% return, translating to about a 13% annualized return. Even with a shorter two-year hold, returns could have been around 260% with an 82% CAGR.

That’s the kind of setup I have in mind. If the stock rebounds significantly, I’d likely take profits—at least on half the position. Holding too long in cyclical stocks can mean giving back gains, as they tend to have boom-and-bust cycles rather than sustained long-term growth like high-growth companies. If I can get a 200% return in two years, I’d rather take that gain and rotate into a new opportunity while still benefiting from long-term capital gains tax treatment.

This stock presents strong mean-reversion opportunities, but given its history of deep drawdowns, it's essential to be patient and strategic with entry points. With rising debt levels, investors should also be mindful of financial stability when evaluating potential buy zones.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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