The End of Akamai?

I know too many riches-to-rags stock stories to count. But I never expected Akamai Technologies (Nasdaq: AKAM  ) to be one of them, especially after how well the business performed in its most recent quarter.  

Yet that's how it's been; Akamai is down more than 40% since January. Bears piled on more misery yesterday as shares of Akamai fell as much as 5% on news that rising competitor Limelight (Nasdaq: LLNW  ) had earned additional business from Microsoft (Nasdaq: MSFT  ) . Limelight supports Mr. Softy's Xbox Live service. But I'm not pulling out my black suit.

Can't we just get along?
I suppose I can understand why investors dumped shares, although I am not one of them. Akamai and Limelight aren't friendly opponents -- Akamai sued its rival for patent infringement in 2006 and the dispute is scheduled to go to trial in February. You'd expect that a win in the market for Limelight is a loss for Akamai, and vice versa.

And news reports would back up your assertion. Blog Silicon Alley Insider cites sources saying that Fox Interactive, the unit of News Corp. that controls MySpace, is transitioning its content delivery business to Akamai.

Video streaming expert Dan Rayburn then confirmed the account in commenting to the article. Why should you care? Rayburn is a lead editor for streamingmedia.com and a regular contributor to SeekingAlpha on the subject of web content delivery. He's been a source for me, too.

Nevertheless, it would be wrong to conclude that web content delivery is purely an either-or business. Microsoft certainly doesn't see it that way. Mr. Softy has used Akamai for years and Akamai spokesperson Sandy Smith yesterday confirmed for me that, despite the hoo-ha over Limelight's press announcement, Akamai hasn't seen a reduction in business from Mr. Softy. She also said that Akamai "didn't bid" for the business Limelight was chasing.

So, yeah, good for Limelight. But bad for Akamai? No, I don't think so.

There's room in this town for the two of us, and a few dozen more
Remember, alternatives to Akamai abound and yet this Rule Breakers selection remains on target to be a $1 billion business by 2010. (Akamai booked $529.1 million in revenue over the trailing 12 months.)

What alternatives, you ask? Several firms have chosen the do-it-yourself route, opting to create data centers whose job it is to manage web traffic flow. Load balancers from F5 Networks (Nasdaq: FFIV  ) and others -- so called for their ability to identify, sort, and deliver traffic in an orderly fashion -- often get a starring role in these infrastructures.

This, by the way, is how Google (Nasdaq: GOOG  ) does it. DoubleGoo now handles much of the content delivery for YouTube, escorting traffic that was once accompanied by Limelight's network.

Then there are Akamai's competitors. Limelight may be the most high-profile but InterNAP (Nasdaq: INAP  ) is growing fast and Level 3 (Nasdaq: LVLT  ) acquired a decent second-stringer in SAVVIS' content delivery network.

A massive and still-growing opportunity
Sound bad? It would if the overall opportunity for Akamai weren't so large. Here are three catalysts that should continue to drive business Akamai's way:

  • Broadband adoption. Only 17% of Americans have access to broadband. Akamai's rise has followed big increases in broadband adoption because having broadband makes it easier to consume large files and more sophisticated Web applications. But there's still a long way to go.
  • A distributed workforce. Distributed workforces are becoming more common. For example, a study from The Dieringer Research Group recently found that Americans are 65% more likely to work at home today than they were two years ago. A distributed workforce demands a more reliable Web, which Akamai delivers.
  • Gaming and entertainment. Akamai already provides digital support for the online elements of the Nintendo Wii and Sony PS3 gaming consoles. ABI Research says the market for online gaming will grow by 95% annually through 2011. Akamai's worldwide network of 27,000-plus servers should have little trouble scaling to meet demand.

And that's just the three I can think of now. The Web has become such a pervasive part of our lives that I dare say there are growth opportunities for Akamai we can't yet envision.

Congrats, Limelight. As for you Akamai bears: You're on notice.

For related Foolishness:

Akamai is one of the more than 10 stocks in the Rule Breakers portfolio to have more than doubled. Discover the identities of the others with a 30-day guest pass to the service. There's never an obligation to subscribe.

Fool contributor Tim Beyers has owned shares of Akamai since 2004 and expects to hold for many years to come. Find Tim's portfolio here and his latest blog commentary here. The Motley Fool's disclosure policy, like Stephen Colbert, says that when it comes to bears, that cute and cuddly exterior hides a killing machine. Lock your doors, Fools.


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