At market close today, Akamai Technologies closed down nearly 19%, going from $47.18 at opening to a dismal $38.27 at the closing bell. According to the press release, revenue is up 52%, and GAAP net income up 92%, year over year. And yet, their stock dropped 19% on this news. Something isn’t right.
In an article on Fool.com, it mentions possible reasons for such a significant drop in price. The article states “bottom-line results didn’t beat the Street’s expectations. Second, Akamai didn’t raise guidance. And third, free cash flow declined year-over-year.”
It seems that the market reacted to the fact that the company did not meet earnings expectations, and that their on hand cash declined significantly. These events may warrant a significant drop in price, but do they really?
Further investigation reveals that the expenditure in on hand cash seems to be in infrastructure, something that is not cheap for a major internet backbone like Akamai. What better place than to be spending money than in developing the infrastructure to support future demand. The article mentioned above goes on to talk about broadband penetration world wide, and states that “If it’s fair to assume that broadband Internet access is a global certainty, and that less than one-seventh of the world’s population has broadband … Akamai’s long-term opportunity remains, at worst, vast.” I could definitely agree that this statement seems true.
One last thing. Did I mention the price to earnings of this stock is around 100 after the price drop? Even after the drop, the price to earnings ratio is not looking pretty. Despite what you may read about this stock, its hard to say that it would be a knock out buy. The price looks good because it is trading very near a 52 week low, but, will it recover? What kind of money will need to be spent on the part of Akamai to in order to serve that percentage of unserved potential broadband customers? Questions like these are what makes this a gamblers game. Would I buy? Probably, but not very much. I know you have to bet big to win big, but its that winning big part that always seems to elude me.
The admin of this site and author of this post, Jon Steege, is not a financial analyst or a stock broker. He would love to “bet big” on Akamai, to reap the reward, but money like that doesnt grow on trees. As always, Jon has no direct financial position in any stock he mentions, he is simply a speculative observer.