Akamai Falls On Overblown Accounting Concerns But Long-Term Growth Still An Issue

Akamai’s (NASDAQ:AKAM) shares fell in trading after the company reaffirmed its guidance for the first quarter of 2013. The dominant CDN player said that it continues to expect revenues in the range of $352-$362 million for the quarter and normalized net income of $0.50-$0.52 per share. However, the markets grew nervous due to a change in tax treatment of certain items which drove non-GAAP adjusted net income down to a $0.45-$0.47 range, creating some amount of confusion around the lower net income figure. The reaction seems a little exaggerated since we see this as only an accounting reclassification which the company believes will help investors evaluate its performance better and has no impact on its operational performance or cash flows.

However, the drop in price brought Akamai’s stock back to what we believe is its fair value. Our price estimate for Akamai’s stock is $36, which we maintain with the view that the high growth that we have come to associate with Akamai in the recent quarters may not be sustainable going forward.

See our complete analysis for Akamai stock here

Weak Online Sales

Last quarter, Akamai experienced weaker than expected online holiday sales, leading to slower revenue growth despite operating in what is seasonally considered as its strongest quarter. A likely continuation of this trend coupled with the management announcing the winding down of contracts of a few media accounts in the current quarter means that Akamai will see only about 14% y-o-y growth in revenues in Q1 2013 at the midpoint of its guidance. This is lower than 16% and 15% y-o-y growth rates seen during the same period in the last two years respectively. We are concerned that the slower growth rate might impact the company, especially since the market has come to expect Akamai to consistently post 20%+ growth every quarter after the blockbuster results in Q2 and Q3 of 2012.

The media segment, which accounted for nearly 42% of revenues in 2012, experienced a 10% decline in growth in the fourth quarter from a staggering 26% in Q3 2012. The commerce segment picked up the slack by growing nearly 17% over Q4 2011 but below company expectations again due to weak online holiday sales. This was unexpected since U.S. online holiday sales experienced a 22.4% jump from last year, according to IBM Digital Analytics Benchmark. If Akamai’s weak online shopping sales trend persists, we expect it be a huge headwind for the company in 2013 as it could be an indication that big online retailers are taking their business to Akamai’s competitors.

Carrier Deals Might Offset Slower Growth

However, the company is extremely bullish on its content delivery network (CDN) partnership with AT&T. In December 2012, AT&T and Akamai entered into a partnership under which all of AT&T’s CDN services would be transferred to Akamai’s network. In this regard, the acquisitions of Cotendo and Blaze will serve to bolster gross margins in the coming years. However, the first half of the year will be the investment phase and this may have an impact on operating margins. The potential success of the deal with AT&T could allow Akamai to pursue other big carriers and help offset slower growth in other segments. The recent Verivue acquisition was made with the carriers in view, and strengthening its licensed CDN software solutions could help Akamai bring more carriers into its fold. (see Akamai Acquires Verivue In An Attempt To Woo Carriers)

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