You're Selling Akamai for the Wrong Reasons

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Investors selling Akamai Technologies (Nasdaq: AKAM  ) are making a mistake.

As I write this, shares of the company behind the web's leading content delivery network (CDN) are down more than 2% for the week. Here's why:

  • Level 3 Communications (Nasdaq: LVLT  ) today confirmed earlier reports that it would take over from Akamai some of Netflix's (Nasdaq: NFLX  ) streaming business. Limelight Networks (Nasdaq: LLNW  ) is also expected to realize some benefit from the shift.
  • Yesterday, Akamai filed suit against smaller rival Cotendo for what it says are violations of three of its key patents for delivering services over the web. Cotendo is a key rival that aims to take away some of Akamai's higher-margin value-added services business, such as accelerated delivery of cloud-computing data. AT&T (NYSE: T  ) and Google (Nasdaq: GOOG  ) are two of the start-up's high-profile partners.

Perceptually, these developments are important. They indicate that Akamai's competitive advantage is under assault. (If it weren't, why sue Cotendo?)

But let's also be real about the money at stake here. Video remains a massive growth market, and Akamai will continue to deliver video for Netflix. Whatever revenue it loses to Level 3 and Limelight -- if any -- will likely be minimal in the larger scheme of the $1 billion empire it's creating.

If you want to worry about something, worry about the Cotendo suit. Value-added services such as e-commerce and web application acceleration (i.e., delivery of cloud-computing data) now comprise more than 50% of Akamai's annual revenue. To ensure future growth, Akamai must stake an unassailable claim on this area of the market. Cotendo and its partners are challenging that claim.

I'll have more on the details of the suit in the coming days. In the meantime, let us know what you think of these developments. Are you tempted to sell Akamai? Or do you see the sell-off as a buying opportunity? Please vote in the poll below, and then leave a comment to explain your thinking.

Interested in more info on Akamai? Add it to your watchlist.

Akamai and Google are Motley Fool Rule Breakers recommendations. Google is also a Motley Fool Inside Value pick. Netflix is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He owned shares of Akamai and Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of Google and is also on Twitter as @TheMotleyFool. Its disclosure policy is a little too raspy to sing in the rain today.

Read/Post Comments (6) | Recommend This Article (5)

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 November 11, 2010, at 3:45 PM, 5574tjh wrote:


    I have been unable to find any patents that Contendo has filed for or been issued.Also one of the patents,in question, has been assigned to Akamai via its acquistion of Netli- Contendo has as principles several Netli employees.Could this be at issue- even though you sold the rights to these patents do you thing the Contendo employees in question still think of the patents as theirs.

  • Report this Comment On November 11, 2010, at 3:55 PM, r3rider wrote:

    Hi Tim,

    Thanks for your timely update and assessment as I was certainly starting to feel concerned. I am a fan of both Akamai and your techie assessments! :-)

    Looking forward to your future updates.

  • Report this Comment On November 11, 2010, at 7:46 PM, crca99 wrote:

    Look forward to more AKAM analysis. I'm up alot, if only the initial investment had been larger, and have wondered if now is the time to move on. I was once advised to be wary of commodities, and as I understand CDN is commodity these days.

  • Report this Comment On November 12, 2010, at 9:27 AM, platypus2323 wrote:

    This one's a no-brainer:

    Short now, long later.

    After all, their P/E is currently 48 and change. Sure, AMAK is a solid company with good prospects for the future, but it's way overpriced, and even though they aren't losing NFLX entirely, they now have to share the business (which is expanding rapidly with no end in sight, BTW). That's just not a good sign.

  • Report this Comment On November 12, 2010, at 10:08 AM, TMFMileHigh wrote:


    Thanks for writing.

    >>... Even though they aren't losing NFLX entirely, they now have to share the business (which is expanding rapidly with no end in sight, BTW). That's just not a good sign.

    No, that's wrong. Akamai never had sole possession of Netflix's streaming business. That all-too-common misperception is why this sell-off makes so little sense.

    Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On November 15, 2010, at 4:00 PM, kramsigenak wrote:

    Well said TMFMileHigh... Not worried about Contendo either, though it bears watching.

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