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Hanging In There With Akamai


How can one play their position in AKAM after yesterday's selloff?

Prof. Zucchi,

I just read your article on Akamai (AKAM). I own 500 shares of AKAM at $52.90. I am riding it all the way down. The company seems to be doing well but... should I lick my wounds and sell or not panic and assume the stock will move back up? I am a small investor and really need solid advice.

Minyan Bill

Dear Minyan Bill–

First the bad news: It has long been a policy in the 'Ville that we don't give advice. At times, I've caught myself thinking "Not Advice" after telling my wife how to make pasta sauce. It's not that we do not want to give advice, it's that we do not have the information to form some kind of sensible advice. So, as far as giving you advice, I am afraid I can't help you.

But here is the good news: AKAM yesterday traded poorly even before the market gave up the ghost. It was for sale all day, and I would not be surprised if that continues until the seller(s) (Fido? Axa? Janus?) is done downsizing. (Stay with me, there is "good news"). But I also spent a good chunk of the day going over a rather tepid research report by Merrill Lynch (MER): it was very thorough and highlighted a whole bunch of concerns surrounding the company. However, for better or for worse, I could not shake the fact that its conclusions (that AKAM is fully valued at current prices) are flat out wrong.
  • Merrill argues that competition is on to AKAM's business, and yet it concedes that AKAM has 60% of the content delivery network (CDN) market;
  • It argues how competitors are jumping ahead of AKAM in specific CDN niches, and yet outlines how the string of recent acquisitions plug the technological shortfalls AKAM might have had vis-à-vis these other companies;
  • It fears that AKAM services will be commoditized from a price standpoint, but highlights how clients with mission-critical applications turn to "premium CDN providers such as AKAM";
  • It speaks of the potential for AKAM up-and-coming WAN acceleration product as if AKAM had to be worried about the competition, rather than the incumbents;
  • It fails to show meaningful international competition (South Korea CDNetworks is mentioned and is definitely worth a better look) while quarter after quarter AKAM's international revenues grow, and by virtue of its tremendously deep worldwide network, AKAM would naturally seem to have a leg up on servicing areas where we could easily see web traffic fight for bandwidth availability;
  • And finally – and most puzzling of all – Merrill models growth rates for virtually every measure you can think of, and arbitrarily decides that those growth rates should persistently merit discount multiples.

And then right on page 4 of the report, in one brief sentence, all these incongruities come together:

"Although valuation is appreciably lower than pre Q2 levels on minimal revisions to EPS forecasts, multiple compression is the result of diminished confidence in the company's ability to exceed forecasts."

And so I go back full circle to the reasons why I sold AKAM when I did (expectations were ahead of fundamentals), why I bought it back when I did (expectations are dashed despite the fundamentals), and why I continue to get longer the stock on days like yesterday (valuations fall behind the fundies).

I can't tell Minyan Bill what to do with his position – but right or wrong I feel perfectly comfortable telling you all what I am doing with mine.

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Position in AKAM
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