First and foremost, I've written ad nauseam that I don't jump deep into a name without buying puts on it. Today that will be the difference between a bad “day” and a bad “year”. Control your risk Minyans – always.
HRS: Its majority owned subsidiary Harris Stratex (HSTX) laid an accounting egg which spilled over onto the parent’s income statement. Tough to tell until HRS reports, but back of the envelope it looks like HRS’ business is running well ahead of estimates. The stock closed at $51.36 and is indicated $47.70-$50.81. Gun to head I think it’ll trade with a $50 handle by the end of the day.
HOLX: The conference call is at 9:00 am but the press release was less than inspiring; the stock is gonna be on double-super-secret probation for a long while and I'm in no hurry to roll down my puts. The company has assembled a great set of products and I think it will eventually emerge as a premiere medical technology company, but it has leveraged up the balance sheet and it's sputtering through its acquisition fueled growth. Tough to argue the company does not deserve the punishment at this stage.
AKAM: I didn't expect the pullback in guidance and in hindsight I can safely suggest that raising guidance last quarter without having locked in the bag was a dumb-arse move; had it not done that, which got the company very little in terms of stock gains, today we’d be yawning at another boring quarter and the stock would likely be flat. The quarter was not that bad, with ARPU’s and new customer ads better than I feared. Let me put my increasingly short neck on the chopping block once again: of all the reasons that can be attributed to AKAM’s marginal slowdown I don't believe the nauseating chatter about competition from this and competition from that is the reason. AKAM remains as close to a monopoly in its space as they come. Even if a legitimate competitor were to emerge, the notion that a company is doomed because it has a few competitors is nonsense. It's the competitors who should be worried about their survival, not AKAM.
Lastly a couple of thoughts on an email I got from Minyan Tsachy:
Dear Professor Zucchi,
I looked at AKAM tonight to see if I should bottom fish. The company looks very cheap on a non GAAP basis. However, under GAAP earnings it doesn't look cheap. The adjustments it made are large and inappropriate in my opinion.The majority of the difference comes from employee stock compensation which is an expense. The other large difference is NOLs. The company argues that you should ignore its estimated taxes because it has so many NOLs. Valuing a company based on no taxes is bullshit. Is this a takeover play for you or do you view the company as cheap? Do you accept the non GAAP earnings?
Thank you,
Minyan Tsachy
I've often buzzed that one of the few things that bugs me about AKAM is how generous it is with its stock options. But the fact is that AKAM employs a battalion of PhD’s, and those brains don’t come cheap. The debate over the expensing of stock options has been beaten to a pulp and I'm not going to try to convince anyone one way or another.
The way I see it is that stock option awards are dilutive but they don’t hurt cash flow. I’ll let each Minyan figure out whether that's good, bad or somewhere in between. However, if I were to “stick it” to the company on the stock option expensing, I certainly would have a tough time arguing that their tax assets should not count. Those NOL’s will become real cash on the balance sheet as they get used up, and to me that’s worth every penny of its face value, as long as a company is nicely profitable.
Is AKAM cheap? Yeah, I think it’s cheap, but that’s not the driving reason I like this company. THE reason is the big picture view I have of AKAM’s business: it is to data distribution what Cisco (CSCO) was to networking in the early ‘90’s, and I believe that with time – and I don’t mean in the “long term” when we are all dead – its services will increasingly become a “need” as opposed to a luxury.
And of course, I could be wrong...
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