Shares of Akamai Technologies (AKAM 2.25%) dropped 13.9% in October, according to data provided by S&P Global Market Intelligence. Most of the drop came after the company reported results for the third quarter of 2020. But investors didn't like results from rival companies like Fastly and Limelight Networks either, putting additional downward pressure on Akamai stock.
A content delivery network (CDN) like Akamai helps make the internet faster by physically placing servers closer to internet users. CDNs aren't new, but there's a heightened awareness of their usefulness. The COVID-19 pandemic has caused more people to be online and that could drag speeds down, highlighting the need for efficient CDNs. Fastly, another CDN, has been a big beneficiary of increased internet usage with its third-quarter revenue growing nearly 43% year over year.
Even with that great growth, Fastly missed analyst expectations for revenue and profit. And Limelight Networks similarly missed profit expectations when it reported quarterly results. These two companies earned multiple downgrades from analysts, dragging Akamai down too.
Perhaps investors had soured on CDN companies by the time Akamai reported Q3 results. The company reported revenue of $793 million, an increase of 12% year over year and exceeding analyst expectations. And it reported earnings per share of $0.95, which was also double-digit growth beyond what was modeled. Furthermore, guidance was as good or better than hoped. Nevertheless, Akamai stock tanked after the report.
When researching a stock, it's important to consider industry trends. Concerning trends, I don't think the need for Akamai's services is going away any time soon -- this includes both CDN and cybersecurity services. Furthermore, the stock sold off on what appeared to be a good quarter. This could create a buying opportunity.
However, as an established player in the space, Akamai isn't growing as fast as some of its younger rivals. Therefore, investors should look beyond the short-term drop in stock price and take a deeper dive into the business to assess the long-term opportunity. It will be important to determine whether it can continue growth (albeit at a slower pace) or whether it stands to cede market share long term to companies like Fastly.