With the stock down more than 15% today and 26% year to date, it's clear that investors are souring over Akamai Technologies
Can you blame them? Revenue grew 15% while normalized per-share earnings improved just 9% in the first quarter, and that's with Akamai's higher-margin value-added services now accounting for 58% of revenue. But that's not the worst part. Management expects essentially zero sequential revenue or earnings gains in Q2.
At the midpoint of guidance, second-quarter revenue would be up just 12% year over year. Growth is slowing, fast. That could be the result of increasing competition from upstarts such as Cotendo and EdgeCast.
Both companies have partnerships with AT&T
And these are the small potatoes. Direct peer Limelight Networks
So there's reason to worry a little. But the outlook isn't the most important part of Akamai's Q1 report. We've known since Q4 that growth wouldn't accelerate again until the second half of this year, when the recent spate of contract resignings should begin to pay off.
All this pales compared to a single number: 32%. Cost of revenues rose that fast during Q1, more than twice the rate of revenue growth.
Servers account for a good portion of the spending. Akamai has added nearly 24,000 new boxes over the past year. CEO Paul Sagan said in an interview yesterday that his company's goal is to "increase reach" globally by adding servers to new networks connected to the traditional and Mobile Web.
That makes sense. As an industry, Akamai and its peers are in the early stages of creating a cloud-computing infrastructure that will carry 26 times more mobile data in 2015 than it did last year, according to a Cisco Systems research report. Akamai is sacrificing some portion of profits now to capture a greater share of this traffic growth later.
Today's sellers don't believe that strategy will pay off. I think they're wrong. What do you say? Tell us what you think about Akamai's report, approach, and competitive differentiation using the comments box below. You can also rate Akamai in Motley Fool CAPS.
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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 has created a bull call spread position in Cisco. The Fool is also on Twitter as @TheMotleyFool. Its disclosure policy is too fast to be seen by normal means.