Relax. Akamai Ain't Dead Yet.

You may have noticed shares of Level 3 Communications (Nasdaq: LVLT  ) and Limelight Networks (Nasdaq: LLNW  ) skyrocketing today while content delivery rival Akamai Technologies (Nasdaq: AKAM  ) is swooning far worse than the general market. The simplest explanation for this unusual market behavior is that investors took one good look at market analyst Dan Rayburn's report that Akamai may be losing its share of the Netflix (Nasdaq: NFLX  ) account to the other two service providers -- and then jumped to nutty conclusions from there.

Rayburn reached his verdict by paying attention to earnings calls, where Limelight boasted of renewing its Netflix contract for another three years and Level 3 reported building out its content delivery network in support of a large customer -- presumably Netflix. Akamai is not making any such claims; at best, the company would keep its existing arrangement alive and share the Netflix account with its rivals, and at worst, Limelight and Level 3 could be running away with this high-profile account altogether.

If Rayburn's reasoning proves correct -- and I don't see any major flaws in his logic -- it would certainly be a bit of a bummer for Akamai and good news for the others. But is it market-moving news that should be capable of adding more than $100 million to Limelight's market cap, for example? Not on your life.

By Dan's own calculations, Akamai collects no more than $15 million of revenue from its 51% share of the Netflix opportunity. While it is a low-cost bid and the others may charge higher prices, we're talking about an annual sales account of $40 million or less, adding all three service providers together. Giving the entire account to Limelight, which sports $144 million in trailing sales, would move that needle significantly -- but that's not even close to what's happening here. It's even less of an event for Level 3 and its $2.75 billion in TTM sales, yet the mere suggestion of winning the Netflix account added 15% to Level 3's market cap.

A pallet of chill pills is in order, because these market moves don't have any basis in even extreme version of the suggested new reality. Dan may be right about the account move, but the market is jumping to some crazy conclusions of its own. This would not be a good day to buy stock in either Limelight or Level 3, folks.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. Akamai Technologies is a Motley Fool Rule Breakers pick. Netflix is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 09, 2010, at 3:43 PM, kramsigenak wrote:

    There's another aspect to this. Dan claimed that the account was lost due to poor performance by Akamai. A claim the both Netflix and Akamai deny today. This reflects on the authors credibility.

  • Report this Comment On November 09, 2010, at 4:01 PM, TMFZahrim wrote:

    To the contrary, Dan spent considerable time and effort to clarify the whole issue with direct commentary from both sides of the story, right here:

    http://goo.gl/LuHgt

    As bloggers and analysts go, Dan Rayburn has always struck me as one of the good eggs, even if we don't always agree on issues like Netflix' valuation...

    Anders

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