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Akamai Earnings Preview: Investors to Ask 'What Have You Done for Me Lately?'


Today's report should shed some light on Akamai's 2012 story, and how the Cotendo deal will play into revenues.

Akamai Technologies (AKAM) reports today after the close and hopefully will shed some light on its expectations for 2012.

Akamai's stock position is not that dissimilar from Acme Packet's (APKT) in the sense that it has had a sharp move higher over the last four months, and its acquisition of Cotendo has captured the imagination of those who can't wait for Akamai to shed the image of being at the mercy of high-volume content distribution, an area becoming increasingly commoditized and with thin profit margins. (See also Will Acme Packet Ever Offer an Attractive Entry Point?)

Cotendo will indeed accelerate Akamai's exposure to value-added services (or VAS), where margins are software like, and has increased Akamai's already sizable technological lead over other VAS providers. The question is when the Cotendo purchase will visibly appear in the top line.

If that is the 2012 story that reaccelerates Akamai's revenue growth, then it is entirely plausible that the stock could start fetching a premium valuation again and quickly head back to the $40s. But if management suggests that Cotendo will play out over a longer period, or some other snag hits the company's 2012 outlook, look out below because in the recent past this stock has burned a whole lot of people, a whole bunch of times, and investors and traders' patience with it feels mighty thin.

Options implied volatilities for February are sky-high, and even the March series is trading at 2x realized vols, suggesting that the reaction to earnings is likely to be somewhat binary -- remember F5 Networks (FFIV)? I wholeheartedly agree with the message of the options, and I am positioned effectively delta-neutral, long the May 35 calls (relatively cheap to realized vol) and short stock.

That's not to say that I like Akamai any less than I have for the last 10 years. At risk of sounding repetitive or "groupielike," Akamai still strikes me as one of a handful of companies exposed to an enormous market, with accelerating growth, significant barriers to entry, a strong cash flowing model, and, just like Acme Packet, a significant scarcity value. But that holds true over a multiquarter and multiyear timeframe.

Near-term, Akamai is subject to the "what have you done for me lately" syndrome just like any other stock, and when 4:01 p.m. Wednesday rolls around, it feels like the bar for Akamai has been set pretty high.

Editor's Note: At Minyanville we often argue that markets and stocks are driven by four primary attributes: the fundamentals, the technicals, the structural, and psychology. In this weekly piece, trader Fil Zucchi will attempt to digest these four measures to come to actionable recommendations, but with a couple of twists: Rather than relying on standard technical analysis, he will examine the technicals through the lenses of "DeMark" indicators. And rather than highlighting straight entry and exit points for stocks, he will use options to gain long / short exposure, control risk, and generate cash flow. Investors should note: This column will be written 1-2 days prior to publication, so by the time it appears the prices of the securities mentioned may have changed.

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Position in AKAM
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