Is Akamai's Advance for Real?

When a stock I own rises 8% in a day, I get curious. Blame the business-focused investor in me. I just don't buy it when a stock jumps without some sort of operational justification, such as better earnings or cash flow. So when shares of Web content delivery king Akamai Technologies (Nasdaq: AKAM  ) made big gains yesterday, on what appeared to be two-day-old news, I scratched my cocked head and wondered what was up. I still don't know for sure, but I suspect it has a lot to do with short-selling investors deciding there's not much profit left in betting against Akamai.

When short positions are covered en masse, the result is what's known as a short squeeze. Having so many people buying back shares pushes up the price, forcing more to cover and driving up the price until it pops, like a jack-in-the-box. My guess is that's what happened to Akamai yesterday.

The shorts have been in shorter supply lately, down from double digits at the end of last year to 6% as of May 9, according to Yahoo! Finance. Give them credit. They've done well since the beginning of the year. There's just no good reason left that I can see to continue with the downer crowd.

Consider: In late April, the company once again reported sequential and year-over-year gains in sales and net income. Gross margin, too, improved quarter to quarter and year over year. At $8.5 million, owner earnings came in a little lower than I'd like, but that was due to roughly $2 million worth of additional capital investment. Surely, some of that amount was spent on the nearly 1,000 new servers deployed during the quarter. Knowing Akamai's intent to expand internationally, this purchase is hardly unexpected, and it's likely to generate plenty of value in the longer term.

Now couple those strong financial results with news this week that government regulators won't be holding up Akamai's acquisition of rival Speedera, and you've got a company that, frankly, is on a roll. The only question worth asking is, can it continue? I'm not a good judge of short-term stock performance, but I'd say my original thesis for investing in the company still stands. That doesn't mean you shouldn't take profits -- by all means, do so if you'd like to. Just don't expect me join in. I want Akamai shares in my portfolio for the very long haul.

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Fool contributor Tim Beyers is a very happy owner of shares in Akamai. Tim didn't own shares in any of the other companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile, which is here. The Motley Fool has a disclosure policy.


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