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Earnings Show Akamai Will Ultimately Emerge as Cloud-Focused Software Company


Today's stock gains are likely connected to where Akamai is going next, not to a pickup in the Media & Entertainment vertical.

Yesterday I suggested that Akamai (AKAM) was trading at levels that would make either bulls or bears very unhappy once the company posted numbers (see Akamai Earnings Preview: Investors to Ask 'What Have You Done for Me Lately?').

More specifically, I said:

"[Akamai's] 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.

"Cotendo will indeed accelerate Akamai's exposure to Value-Added-Services where margins are software like, and has increased Akamai's already sizable technological lead over other VAS providers. The question is when will the Cotendo purchase visibly appear in the top line....

"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."

As it turns out, I was right about some things and wrong about others, as is always the case in this business. With the stock up some 13%, I was correct in judging that at $34 the price did not discount either good news or bad news, so when traders saw good numbers, it was off to the races. I was only partly right in assessing what areas of Akamai's business investors were focused on. Cotendo was a non-issue on the call, since Akamai declined to make any comments until it closes the deal. But there's little doubt in my mind that the bulk of today's stock move can be attributed not to a pickup in the Media & Entertainment (M&E) vertical, but to the fact that with infrastructure/cloud/security emerging as an ever bigger source of revenues, M&E and the rest of the more volume-based /price-sensitive business can continue fading away from being the daily obsession of fearful sell-side analysts.

M&E, budget flushes, seasonality, etc. all converged to surprise to the upside – and that's great. But that's not worth a whole lot if it's a one-time thing. The good news from last night, and from the acquisition of Cotendo, Blaze, and whatever else it will buy next, is that slowly but surely Akamai continues its metamorphosis into what will ultimately emerge as a software company (rather than a Content Delivery Network) integral to the cloud (and by that I mean the coming BIG cloud, not the current embryonic versions), just as VMware (VMW) is integral to the build-out of the cloud today.

I understand that for traders with nanosecond attention spans the above picture is not really actionable, which is why I'm all for "trading around" a story like Akamai while always keeping on some exposure for the long term. So circling back to my "long May 35 calls / short stock" posture, I'm using today's moves to sell near dated puts and calls around the May 35s and the stock short. Once things settle down, I will then re-adjust my time frames and positions to settle in for the next six to 12 months.

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.
Positions in AKAM, FFIV
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