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Why Akamai Technologies, Inc. Fell 18% Today

By Anders Bylund – Jul 27, 2016 at 1:17PM

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The content delivery specialist is watching its largest clients relying more and more on their homegrown content networks.

Image source: Getty Images.

What: Shares of Akamai Technologies (AKAM -1.95%) fell as much as 17.6% in Wednesday's morning session, following the release of unexciting second-quarter results.

So what: In the second quarter, the content delivery network veteran saw sales rise 6% year over year to $572 million. Adjusted earnings increased by 12%, landing at $0.64 per diluted share. The earnings result was in line with the centerline of management's guidance range for the quarter, while revenue fell in the bottom half of expectations. Analysts modeled their estimates after Akamai's guidance targets, so revenues fell short of Wall Street's targets as well.

Akamai CEO Tom Leighton explained the revenue shortfall with soft orders from one of the company's two largest customers. That unnamed company is leaning into its own in-house content delivery network (CDN) much faster than expected, thus relying less on Akamai's services.

Now what: The do-it-yourself CDN trend is not new. Akamai has been tracking the DIY efforts of six online giants for several quarters now.

"Most of these companies spend large sums of money on infrastructure and some consider CDN to be a core part of their platform," Leighton said in a conference call with financial analysts. "All are well known to have DIY capabilities and all are Akamai customers."

But such tactics are the domain of a few very large businesses, and not a sensible option for most of Akamai's customers. And the potential revenue losses from the DIY trend are not huge -- the Big Six added up to just 11% of Akamai's total sales in the second quarter.

So Akamai continues to diversify its revenue stream. Meanwhile, investors worry that the company's technology is becoming obsolete under the DIY onslaught, and share prices have fallen 33% lower over the last 52 weeks. That's probably an overreaction, but I'm happy to stay on the sidelines until Akamai can prove that other efforts are making up for the sales lost to clients with DIY habits.

Anders Bylund has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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 has a disclosure policy.

Stocks Mentioned

Akamai Technologies Stock Quote
Akamai Technologies
$89.81 (-1.95%) $-1.79

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