This Cloud Infrastructure Stock Misses Revenue Expectations

Muhammad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Akamai Technologies, Inc. (NASDAQ: AKAM) recently witnessed a steep decline in its share price after the company announced the financial information for the fourth quarter of 2012. Despite showing growth in both revenue and net profit, the company’s share took a hit as the amount of revenue did not coincide with the analysts’ expectations. For the fourth quarter, Akamai reported a net income of $68.3 million which was higher than the net income of $60.1 million in the same quarter last year. The EPS of the company stood at $0.38, which was also higher than $0.33 in the same quarter last year. The revenue for the quarter was $377.87 million which was 17% higher than last year’s revenue which stood at $323.74 million. Although the revenue was higher when compared to the last year’s fourth quarter, it was lower than the analysts’ estimate which was $381.32 million. Due to this difference between the actual and estimated figure, the share price of the company fell by a noticeable degree. The following chart represents the financial information of Akamai over the past few quarters.

<img src="/media/images/user_13010/akam_large.jpg" />

(Source: Google Finance)

It can be observed from the chart that the financial performance of the company has improved in the last quarter. However, the company did not perform in accordance with the expectations surrounding it. Despite not meeting the expectations, it can be said that the financial performance may continue to improve in the prospective periods.

The main competitors of the company are: Level 3 Communications (NYSE: LVLT) and Limelight Networks, Inc. (NASDAQ: LLNW). These three companies form a major chunk of the Internet content delivery service industry. Level 3 Communications provides a range of communications services that directly overlap with the services provided by Akamai. Apart from data services, Level 3 Communications provides infrastructure and transport. Therefore, it can be Level 3 Communications has a more diversified business as compared to Akamai. Limelight Networks also provides services that directly overlap with those provided by Akamai. Limelight Networks holds high-performance computing platform over which it provides a range of content delivery services. However, Akamai holds an edge in terms of profitability as its financial performance is better than both its competitors. 

In terms of market capital, Akamai leads the industry with $6.31 billion, while Level 3 Communications and Limelight Networks hold $5.35 billion and $226.02 million respectively. Akamai is also the leader in terms of profitability, as the company holds an average EPS of 1.12, while LVLT and LLNW hold -2.49 and -0.26 respectively. This shows that Akamai has remained profitable for a longer period of time, while Level 3 Communications and Limelight Networks have been turning in losses. Therefore, it can be said that Akamai has a significantly stronger financial performance when compared to its competitors.

Market Performance

On Feb. 6 shares of the company were being traded around $41.50; however after the disclosure of the financial information for the fourth quarter, the shares fell to around $33.80. Currently the shares of Akamai are being traded within the range of $34.78 and $35.53. It cannot be said with certainty when or whether the share price of the company will revert back to its former point. The 52 week range of the share price has been between $25.90 and $42.53. The significant difference between the two extremes suggests that the share price of the company has been highly volatile over the past months. The volatility of share price can be favorable for some shareholders, while it can be highly unfavorable for others. A number of analysts have downgraded the stock ratings for Akamai considering the highly volatile market performance. The analysts at Janney Montgomery Scott downgraded the shares from a “buy” to “neutral” with a price target of $40. On the other hand, Jefferies Group also downgraded the stock to “hold” with a $40 price target.

Akamai’s Share Repurchase Program

Akamai also announced that it is extending its share repurchase program and it will buy back shares amounting to $150 million. The company’s objective for the share repurchase is to cancel the effect of dilution created by its equity compensated programs. The shares are expected to be repurchased through the company’s own free cash flow.

After the analysis of multiple relevant factors, in my opinion, the investors should hold the shares in the company. The rationalization behind this recommendation is that the market performance of the company has been highly volatile and buying the shares may be an unfavorable decision. Although there is an expectation that the financial performance of the company will continue to be positive, the same cannot be said for the market performance of the company. It cannot be said with a sufficient level of certainty whether the share price of the company will be back to where it was a few days ago.

muhammadbazil has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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