Akamai Shares Plunged: What You Need to Know

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of web content delivery expert Akamai (Nasdaq: AKAM  ) took a dive today, falling as much as 17% in intraday trading on heavy volume.

So what: On the bright side, Akamai's fourth-quarter results looked good. Revenue of $285 million was up 19% from 2009 and slightly above analysts' estimates. Normalized net income, meanwhile, climbed 22% to $0.40, ahead of the $0.38 that Wall Street was looking for. However, the company's first-quarter guidance disappointed the market. The forecast for earnings per share of $0.35 to $0.37 was short of the $0.38 bar that analysts had set. The disappointment also helped drag down shares of competitor Limelight Networks.

Now what: Akamai's management blamed the soft first-quarter guidance on signing long-term media deals at lower prices. The company, which helps companies like Hulu and Netflix (Nasdaq: NFLX  ) get content to customers, believes that the contracts will be a positive over the longer run but will negatively impact first-quarter earnings.

Looking at the big picture, the first-quarter guidance doesn't seem nearly as terrible as the market's reaction suggests. However, as The Wall Street Journal's Matt Phillips emphatically pointed out, investors (speculators?) have been paying a particularly high price for Akamai shares and "the higher the valuation, the less room for error there is." Even after today's slide, it's still hard to not consider shares expensive, so investors may want tread carefully.

Want to keep up to date on Akamai? Add it to your watchlist.

Akamai Technologies is a Motley Fool Rule Breakers recommendation. Netflix is a Motley Fool Stock Advisor pick. 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.

Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.

Read/Post Comments (2) | Recommend This Article (10)

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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 February 10, 2011, at 5:02 PM, Quick2learn wrote:

    Plenty of people have ridden this star to this level. Of course it became pokey lately with not too much on the upside. The flag that it is overpriced has been waved before, but with a nearly $8 drop, will those star riders show up tomorrow? Perhaps not as there will be more settling in the price, this happened a few months ago when a 'correction' in A

    KAM's price dropped it greatly. In a week or two my two cents believes it will foolishly rise again!

  • Report this Comment On February 10, 2011, at 6:40 PM, deinfrank wrote:

    Will these long term contracts make it possible for akamai to surprise us in the future? I think not.

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