AKAM revisited

This was my real lemon call. I like the long-term story and I suggested lousy risk/reward from the level the stock was trading in front of the quarter. They beat estimates and raised the outlook.

When I laid out risk/reward on the stock, I said it was $26/$34. Well, here we are at $34. Still like the story. Think this is the big chart trouble level, though, so I have to stay negative on it here.

Unfortunate when you talk yourself into the wrong side of a story you like. It happens sometimes. I have to be more careful about that.

I stand by my earlier statements that the risk/reward stinks at $34. The stock is a sale here.

AKAM Q4:2007 Results (2)

"Let me share some thoughts with you about 2008. When we spoke with you last fall, we guided to 25 to 30% growth for 2008. Given our strong fourth quarter, this implies a higher revenue number, so we are raising our 2008 full year revenue guidance to between 800 and $825 million, or 26 to 30% annual growth we expect our normalized net income to grow in line with or slightly faster than our revenue growth or 27 to 31% on a year-over-year basis. This implies normalized EPS in 2008 of $1.65 to $1.70, or 25 to 29% annual growth. On margins, overall we expect to see the same gross margin trend downward in 2008 as we have in the last few years, although at a slower rate, with the gross margin declines being offset by EBITDA improvements. Specifically, we expect cash gross margins to decline by roughly 2 points this year, while EBITDA margins will expand by roughly 2 points. Given the opportunities we see in this high growth market, we want to ensure that we are making the appropriate levels of investment in 2008 to drive our future performance, and we expect to continue to add resources to support our growth."

So they're saying the EBITDA margins will decline slower than gross margins, which is good. Revenue estimates will rise slightly in line w/ the beat for the quarter. They're saying the right things so far so I'd assume the stock isn't going to fall apart here.

In my opinion the risk/reward is still skewed to the downside at this level as this won't be enough to send the stock soaring through its resistance at $34. It will probably trade $32.3 (the "attraction spot" on the chart) at some point.

I like the story longer-term but this isn't the right price to buy it.

AKAM Q4:2007 Results

Company reports better revenues and better EBITDA margins than forecast, coming in 7mm better on the top line and showing 47.4% EBITDA margins. Looks ok so far. Currently trading a little under 31.

Akamai (AKAM) – Great Space, Rough Race

Expect strong revenue growth with continued pressure on gross margins due to an increasingly competitive market. Content data services of the type Akamai provides are in high demand. Internet video is unquestionably creating a good tailwind for them. I have no edge on the quarter itself. I'm a little concerned as they've been seeing a deceleration in revenue growth and a reduction in operating margin so far this year. If they hit consensus numbers for the quarter, it will be the first time in the last 3 years their year over year sales in Q4 will be slower than their year over year sales in Q3 and the first time they'll have single digit sequential growth for Q4. Revenue estimates are pegged at around $175mm for the quarter. Street consensus is looking for mid single digit revenue growth for next quarter. If you don't see beats on revenue for the current quarter and guidance, the stock is likely to get pummeled. Gross margins will be a closely watched metric as it's the trapdoor in the model right now – the street seems to be using roughly 74% as an estimate. The more important metric, or the hinge factor, is EBITDA margin, estimated at about 46.3%, which is theoretically a better gauge of their ability to monetize growth.

The big issue with the stock is if they hit numbers, the company is still decelerating pretty quickly overall. I would expect that as internet video continues to pick up steam and streams, growth rates will stabilize. Until that happens this stock is risky despite their attractive positioning in the content delivery market.

Here's the chart.



Looks to me like its got some kind of support at $26 an area of attraction at $32.3 and resistance at $34. Here at $31, re-reading what I wrote, it seems like there's a better shot at making money in the stock on the short side as opposed to the long side into the quarter.