Akamai Sees Huge Opportunity

The tech rally is real? Tell it to Akamai   (Nasdaq: AKAM  ) investors. Shares of the leading Web content delivery network (CDN) are down more than 20% as I write this morning.

Last night's second-quarter report was a disappointment. Revenue, at $204.6 million, rose just 5% year over year, falling well short of what executives and the Street expected. Per-share profit fell to $0.40 per diluted share on a non-GAAP basis, also trailing estimates, and down 2% over last year's Q2. So much for outracing the recession.

For its part, Akamai says that a major advertising deal with a retailer fell apart in the last week of the quarter, costing it $1.4 million in lost profit.

But that's one issue among many. CEO Paul Sagan told me in an interview yesterday that customer churn was once again 5%, and that Akamai was facing increased price pressure in its volume CDN business, notably in the media vertical.

If that sounds bad, it is. Media accounts for some of Akamai's best-known accounts, including Apple (Nasdaq: AAPL  ) . The company has been delivering iTunes purchases over the Web since its digital music store first opened.

Video creates a new Web star?
But is this story really as bad as it sounds? Not to Sagan. He told investors that in the long term, there's a huge opportunity in video delivery. Sagan believes Akamai's network design makes it best-positioned to serve the bulging bitrates that Web video demands.

"No matter who you ask, from the producers who make the television shows and movies to the networks and cable, satellite and telco distributors, we appear to be on the verge of a sea change that will bring a flood of new video to consumers over the Internet across three screens; PCs, TVs and smart phones," Sagan said.

Skeptics will rightly note that Google (Nasdaq: GOOG  ) still hasn't figured out exactly how to monetize YouTube. Yet revenue models are emerging, and traditional media moguls such as General Electric (NYSE: GE  ) and News Corp. (Nasdaq: NWS  ) have begun using the Web for programming. Besides, in video, piracy isn't as attractive an option as it once was.

So my money is with Sagan. Even if the market for video delivery is crowded with hungry competitors such as Limelight Networks (Nasdaq: LLNW  ) , Level 3 Communications (Nasdaq: LVLT  ) , and privately-held BitGravity, among others, there's no doubting the shift of which Sagan speaks, nor the opportunity it affords.

This is a big pie, and I expect Akamai will enjoy a sizable slice.

Get your clicks with related Foolishness:

Start investing today -- just $7 per trade with Scottrade. Or find the broker that's right for you.

Apple is a Stock Advisor selection. Akamai and Google are Rule Breakers recommendations. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers had stock and options positions in Apple and Google and a stock position in Akamai at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy likes a good stretch before its morning coffee. (Yaaawwwwwn.)


Read/Post Comments (1) | Recommend This Article (12)

Comments from our Foolish Readers

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 July 31, 2009, at 12:24 PM, mikeinmadrid wrote:

    Seems to be a timing issue of the recession, contract renewals and traffic growth. Difficult to tell from one bad quarter. From the CC....

    <i>As we come up on the first anniversary of the global economic downturn of 2008, we believe we are seeing the delayed impact of the recession on our business. Our recovering revenue model makes us somewhat of a lagging indicator while the recession began to impact the IT industry last year with dramatically slowed product sales, we continued to grow our revenue and profitability based in part on long-term contract relationships covered by ongoing contracts with our clients.

    Now we are seeing a bit of a reverse. The impact on us of new contracts and pricings signed over the months since the downturn of last fall. Fortunately, more recently, we’ve begun to see traffic growth pick back up a very positive sign. We’ve become even more aggressive on pricing to support and encourage positive volume growth with key customers.</i>

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 954069, ~/Articles/ArticleHandler.aspx, 8/28/2014 1:24:07 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement