Akamai stock heads for the clouds

Earnings show Akamai will ultimately emerge as a cloud-focused software company.

By Minyanville Feb 9, 2012 1:36PM
Image: Clouds in a blue sky (© Purestock/Getty Images)By Fil Zucchi

Shares of Akamai (AKAM) surged in after-hours trading Wednesday following a fourth-quarter earnings report that topped estimates. They continued to climb Thursday, more than 10% by midday.

Before the results were issued, I suggested that Akamai was trading at levels that would make either bulls or bears very unhappy once the results were out (see Akamai Earnings Preview: Investors to Ask 'What Have You Done for Me Lately?').

More specifically, I said:

"[Akamai's] acquisition of Cotendo has captured the imagination of those who can't wait for Akamai to shed the image of being at the mercy of high-volume content distribution, an area becoming increasingly commoditized and with thin profit margins. "Cotendo will indeed accelerate Akamai's exposure to value-added-services where margins are software like, and has increased Akamai's already sizable technological lead over other VAS providers.  The question is when will the Cotendo purchase visibly appear in the top line. . . ."

As it turns out, I was right about some things and wrong about others, as is always the case in this business.

With the stock heading up Thursday, I was correct in judging that at $34 the price did not discount either good news or bad news. When traders saw good numbers, it was off to the races. I was only partly right in assessing what areas of Akamai's business investors were focused on. Cotendo was a non-issue on the call, since Akamai has declined to make any comments until it closes the deal.

I'm convinced, however, that the bulk of the stock move shouldn't be attributed to a pick-up in the media & entertainment (M&E) vertical. It has, instead, been fueled by the fact that with infrastructure, cloud, and security emerging as an ever bigger source of revenue, M&E and the rest of the more volume-based, price-sensitive business can fade away as a daily obsession of fearful sell-side analysts.

M&E, budget flushes, and seasonality all converged to surprise to the upside -- and that's great. But that's not worth a whole lot if it's a one-time thing. The good news from the earnings report, and from the acquisition of Cotendo, Blaze, and whatever else the company will buy next, is that slowly but surely Akamai continues its metamorphosis into a software company (rather than a content delivery network) integral to the cloud. And by that I mean the coming BIG cloud, not the current embryonic version).

I understand that for traders this long-term picture is not really actionable, which is why I'm all for "trading around" a story like Akamai while always keeping on some exposure for the long term. Circling back to my "long May 35 calls/short stock" posture, I'm using Thursday's moves to sell near-dated puts and calls around the May 35s and the stock short. Once things settle down, I will then re-adjust my time frames and positions to settle in for the next six to 12 months.
Tags: AKAM
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