Investors have got the fever. After seeing 3PAR (NYSE: PAR) jump from $10 to $30 a share and ArcSight (Nasdaq: ARST) zoom ahead from $25 to $43 in the last month, they are pushing up shares of any name they think might be the recipient of the next sweet buyout offer. And now investors have set their sights on Akamai Technologies (Nasdaq: AKAM), pushing its shares up from below $40 in late July to a recent $51. Trouble is, shares were likely overvalued before that surge began, and are now very overvalued when measured against the fundamentals. If a suitor doesn’t emerge — and it’s not clear that one will — then shares could give back all of the recent gains.

A CDN pioneer
Akamai helps major web sites provide very fast response times to users located anywhere in the world. If you’re downloading a popular video in Madrid, there’s a decent chance that a local Akamai server is serving up that file, eliminating the need to transmit that content over long distances while the user sits and waits. And in recent years, the company has developed other software tools to help customers stay on the cutting edge with its Content Delivery Network (CDN).

As consumers looked to consume more media and entertainment online, demand for Akamai’s services exploded, helping sales rise at an average of more than +30% per year from 2004 to 2008. But success — and an increasingly large industry opportunity — has a way of attracting new competition. And that began happening in recent years, which helps explain why growth cooled to less than +10% in 2009. Akamai’s shares, which hit $50 in early 2007, fell below $15 in late 2008 as investors realized that the CDN industry had become crowded and very cost-competitive.

A 2010 and 2011 rebound
Akamai is once again on the upswing as renewed industry growth, along with a push into ancillary services, is offsetting a steady decrease in CDN pricing. (These companies get paid monthly fees for providing CDN services, and contracts are usually renewed at ever-lower prices). The favorable industry trends are likely to push Akamai’s sales up nearly +20% this year and another +15% in 2011.

But more headwinds loom. Companies such as Amazon.com (Nasdaq: AMZN) are vowing to make a bigger push into the CDN business, and major telecom operators such as AT&T (NYSE: T) also realize that their networks are ideally suited to carry higher volumes of CDN traffic. As a rule of thumb in this industry, increased competition invariably leads to faster CDN pricing declines.

None of this suggests that Akamai is in real trouble. Demand for CDN services will keep growing, the company has a very strong balance sheet, and many of its customers are likely locked in for the long-haul. But this is not a great long-term story from a revenue growth perspective, thanks to those ever-present price decreases.

Yet shares have zoomed ahead to levels that give the impression that Akamai is a young fast-growing upstart. Shares trade for more than 30 times next year’s projected profits and close to 20 times EBITDA, on an enterprise value basis. The shares are currently trading just below $51 — analysts at Maxim Group think fair value is closer to $35. Citigroup’s analysts are slightly more bullish, assuming a $42 target price, noting that shares deserve to trade no higher than at 25 times next year’s profits.

Action to Take –> Shares of Akamai took a big hit in 2008 as investors realized that this is becoming an increasingly crowded business with real price pressures, so potential buyers are unlikely to pay much of a premium after the recent run-up. It’s not even clear that any potential acquirer could justify buying the company now and make the deal work from an EPS growth perspective. For that matter, who knows if Akamai is in play at all?

If you’ve been holding Akamai in your portfolio, this looks like a great time to exit that position. If no buyer emerges for the company in coming weeks and months, then shares are likely to move back toward those analyst price targets. Moreover, shares are so richly valued that they have created an excellent opportunity for shorts, which may see this stock move back below $40 as a deal fails to materialize. The main risk to the short thesis is an actual buyout, which again, appears unlikely.