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Digging In On Akamai


For the first time in a long time AKAM is likely seeing some pricing pressure.


After Akamai's (AKAM) 1Q report, I was hoping for lower prices still in order to rebuild my long. After the 2Q report, and in the midst of a general market meltdown, I got my wish. I read and re-read AKAM's call transcript, and short of another bout of dashed expectations on the part of analysts, there was very little wrong with the company's results.

Top and bottom-line growth continues to hum along – and whether the growth rate is 50% or 35%, at the current stock price it seems rather irrelevant; content distribution remains one of a handful of truly secular growth opportunities; "application acceleration" is a couple of quarters away from becoming the catalyst for another growth spurt.

AKAM's "deadly sin" consisted of higher CapEx and R&D expenditures, the first driven because business is hot, and the latter because the company does not want to risk losing its leadership place. Given the stock reaction, I suppose people would prefer seeing AKAM sitting on its technology and/or wishing for less brisk business so it would not have to spend money to make more money. And don't even get me going on the talk about net customer ads. The few times the company ever explicitly discussed this figure (years ago), it "guided" to new ads in the 65-75 range. Since it obliterated that figure quarter after quarter, the high end of that range is now a "disappointment". And were folks actually second-guessing 5% sequential growth in ARPU's?

No, I am not oblivious to the fact that the simultaneous appearance of "margin problems", and of Limelight Networks (LLNW) as a publicly traded competitor, are probably more than a coincidence. For the first time in a long time AKAM is likely seeing some pricing pressure. But so what? If a seal-tight monopoly has now become a pre-requisite for successful growth, the list of investable companies has just gone through the incredible shrinking machine. And I am also not ignoring that the stock has been trading very heavy since it broke.

Time and price will determine if I am the "dope" or the "smart money", but in an environment where a slew of companies trade on takeover hopes, and where the wisdom of leveraging up balance sheets for financial engineering is revealing its essence, I will gladly pay the current cash earnings multiples (24x forward 12 months estimates) for AKAM's "disappointing" growth, especially with Jan 30 puts trading for a bit more than $1 to insure against broader market melt-downs or other unforeseen calamities.
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Position in AKAM
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