Analysts: Akamai Was Too High
The share slide began after many investors were disappointed the company didn't beat expectations or raise its forecast for the rest of the year. The slide continued amid downgrades and lowered price targets by Wall Street analysts.
Akamai shares closed at $47.18 ahead of its earnings release and conference call last Wednesday. The stock closed today at $36.13, which is down about 8 percent from its share price a year ago.
Despite strong demand for content delivery networks, analysts believe that Akamai's days of beating the Street could be over, at least for now. W.R. Hambrecht & Co. analyst Robert Stimson wrote in a research note last week that Akamai "is no longer a 'beat and raise' story," so that could keep the stock down for a while.
Merriman Curhan Ford & Co. Colby Synesael downgraded Akamai, but says it's "a good company and CDN is a good space." He says his downgrade was due to the company's valuation, not so much weakening fundamentals. Akamai looked expensive because it was trading more than 20 times its 2008 EBITDA target before its earnings call, Synesael says, and its peers were trading at about 13 times their 2008 EBITDAs.
Akamai reported net income of $21.6 million, or 12 cents a share, on revenues of $152.6 million for the second quarter of 2007, compared with earnings of 11.3 million, or 7 cents a share, on sales of $100.6 million in the year-ago quarter. (See Akamai Reports Q2.)
Although Akamai increased its sales by 52 percent year-over-year and 10 percent on a sequential basis, analysts and investors alike were disheartened by in-line earnings growth, disappointing guidance, and less attractive gross margins.
Analysts see a squeeze in the company's gross margins coming from increased capex spending. But they say margins will also take a hit as Akamai keeps selling larger and longer contracts to big media companies. Those contracts are lucrative, but they come at a lower per-bit cost, so the company's margins take a hit in the name of locking down some premium business.
Akamai continues to see competition in the CDN space, as a number of new entrants have emerged to offer streaming and download services. Despite this, most analysts expect Akamai to continue ruling the rapidly growing market for content delivery.
Hambrecht's Stimson wrote, "We believe that Akamai remains the premier company in the content delivery space. Although we believe investor expectations became unrealistic in H1:07 and turned Akamai into a 'beat and raise' story, we believe these expectations have been reset to achievable levels."
— Ryan Lawler, Reporter, Light Reading